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




 
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                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON

                       DOMESTIC AND INTERNATIONAL

                 MONETARY POLICY, TRADE, AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 2, 2008

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-102


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

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

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Domestic and International Monetary Policy, Trade, and 
                               Technology

                 LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York         RON PAUL, Texas
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
PAUL E. KANJORSKI, Pennsylvania      FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California             DONALD A. MANZULLO, Illinois
GWEN MOORE, Wisconsin                WALTER B. JONES, Jr., North 
GREGORY W. MEEKS, New York               Carolina
DENNIS MOORE, Kansas                 JEB HENSARLING, Texas
WM. LACY CLAY, Missouri              TOM PRICE, Georgia
KEITH ELLISON, Minnesota             PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio              MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida               PETER J. ROSKAM, Illinois
JIM MARSHALL, Georgia                KENNY MARCHANT, Texas
DAN BOREN, Oklahoma                  DEAN HELLER, Nevada


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 2, 2008................................................     1
Appendix:
    April 2, 2008................................................    39

                               WITNESSES
                        Wednesday, April 2, 2008

Abend, Valerie, Deputy Assistant Secretary for Critical 
  Infrastructure Protection and Compliance Policy, U.S. 
  Department of the Treasury.....................................    10
Abernathy, Wayne A., Executive Vice President, Financial 
  Institutions Policy and Regulatory Affairs, American Bankers 
  Association (ABA)..............................................    29
Kitada, Ted Teruo, Senior Company Counsel, Legal Group, Wells 
  Fargo & Company................................................    32
May, Harriet, President and CEO, GECU of El Paso, Texas, on 
  behalf of the Credit Union National Association (CUNA).........    27
Roseman, Louise L., Director, Division of Reserve Bank Operations 
  and Payment Systems, Board of Governors of the Federal Reserve 
  System.........................................................     8
Williams, Leigh, BITS President, the Financial Services 
  Roundtable.....................................................    30

                                APPENDIX

Prepared statements:
    Gutierrez, Hon. Luis.........................................    40
    Paul, Hon. Ron...............................................    42
    Abend, Valerie...............................................    43
    Abernathy, Wayne A...........................................    45
    Kitada, Ted Teruo............................................    59
    May, Harriet.................................................    91
    Roseman, Louise L............................................    95
    Williams, Leigh..............................................   105

              Additional Material Submitted for the Record

Gutierrez, Hon. Luis:
    Letter from Americans for Tax Reform, dated April 1, 2008....   119
    Letter to Hon. Jim Nussle, OMB, from a coalition of 
      organizations, dated December 10, 2007.....................   120
    Letter to Chairman Gutierrez and Ranking Member Paul from 
      Chamber of Commerce of the United States of America, dated 
      April 1, 2008..............................................   122
    Letter to Chairman Gutierrez and Ranking Member Paul from the 
      Center for Regulatory Effectiveness, dated March 31, 2008..   125
    Notice of Office of Management and Budget Action, dated 
      February 1, 2008...........................................   128
    Statement of Marcia Z. Sullivan on behalf of the Consumer 
      Bankers Association, dated April 2, 2008...................   129
    Letter to Chairman Gutierrez from the National Association of 
      Federal Credit Unions, dated April 1, 2008.................   134
    Statement of Rick Smith, UC Group Limited, dated April 2, 
      2008.......................................................   136
    Letter to Jennifer Johnson and Valerie Abend from the Office 
      of Advocacy of the U.S. Small Business Administration, 
      dated December 12, 2007....................................   159
    Statement of Gregory A. Baer, dated April 2, 2008............   164
    Statement of Joseph H.H. Weiler, dated April 2, 2008.........   171
Bachus, Hon. Spencer:
    Letter from the National Association of Attorneys General, 
      dated November 30, 2007....................................   181
Davis, Hon. Geoff:
    Letter from the National Thoroughbred Racing Association, 
      dated December 11, 2007....................................   186
King, Hon. Peter T.:
    Statement of Hon. Pete Sessions, dated April 2, 2008.........   188
    Letter to Hon. Henry Paulson and Hon. Ben Bernanke, dated 
      December 12, 2007..........................................   190
    Letter to members of the Financial Services Committee from a 
      coalition of family and faith-based organizations..........   194
Meeks, Hon. Gregory W.:
    Responses to questions submitted to the American Bankers 
      Association................................................   197
    Responses to questions submitted to BITS, the Financial 
      Services Roundtable........................................   203
    Responses to questions submitted to the Credit Union National 
      Association................................................   207
    Responses to questions submitted to Wells Fargo..............   209
Board of Governors of the Federal Reserve System:
    Responses to questions from Hon. Gregory W. Meeks............   217
    Responses to questions from Hon. Donald A. Manzullo..........   221
U.S. Department of the Treasury:
    Responses to questions from Hon. Gregory W. Meeks............   222
    Responses to questions from Hon. Donald A. Manzullo..........   225
Paul, Hon. Ron:
    Letter to members of the Financial Services Committee from a 
      coalition of family and faith-based organizations..........   226
    Letter to members of the Financial Services Committee from 
      major professional sports leagues and the National 
      Collegiate Athletic Association, dated April 2, 2008.......   229
    Letter to the Board of Governors of the Federal Reserve 
      System and the U.S. Department of the Treasury from major 
      professional sports leagues and the National Collegiate 
      Athletic Association, dated December 12, 2007..............   231


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                        Wednesday, April 2, 2008

             U.S. House of Representatives,
                       Subcommittee on Domestic and
                     International Monetary Policy,
                             Trade, and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 2128, Rayburn House Office Building, Hon. Luis V. 
Gutierrez [chairman of the subcommittee] presiding.
    Members present: Representatives Gutierrez, Waters, 
Sherman, Moore of Kansas, Clay, Wexler; Manzullo, Hensarling, 
McHenry, and Marchant.
    Ex officio: Representatives Frank and Bachus.
    Also present: Representatives Murphy, King, and Davis of 
Kentucky.
    Chairman Gutierrez. This hearing of the Subcommittee on 
Domestic and International Monetary Policy, Trade, and 
Technology will come to order. Good morning and thank you to 
all of the witnesses for agreeing to appear before the 
subcommittee today. Today's hearing will focus on the proposed 
regulations to implement the Unlawful Internet Gambling 
Enforcement Act of 2006. These regulations were published for 
comment in October of 2007, and the comment period closed on 
December 12, 2007, with over 200 comments being received.
    For our first panel, we will hear from the issuers of the 
proposed regulation: the Treasury Department and the Federal 
Reserve Board. Our second panel includes representatives from 
the financial services industry, and I'm betting that we will 
have a lively debate on this issue.
    We will be limiting opening statements to 10 minutes per 
side, but, without objection, all members' opening statements 
will be made a part of the record. I yield myself 5 minutes.
    The focus of today's subcommittee hearing is the proposed 
regulations to implement the Unlawful Internet Gambling 
Enforcement Act of 2006. The Act prohibits the U.S. payment 
system from accepting payments or bets or wagers made by U.S. 
citizens who seek to gamble online. The law also requires the 
Federal Reserve Board and the Treasury Department to issue 
regulations mandating that payment systems identify and block 
all restricted transactions.
    In October of 2007, the draft regulations were issued and 
more than 200 comments were filed in response. As proposed, the 
regulations would require most companies involved in the 
payment systems, from banks and credit card companies, to many 
transmitters and payment processors, to develop and implement 
policies and procedures designed to identify and block unlawful 
Internet gambling transactions.
    The regulations have been widely criticized as being vague 
and costly for financial institutions to implement. One of the 
most common complaints is that the proposed rules fail to 
sufficiently define key terms, leaving financial institutions 
with significant compliance difficulties. For example, the 
regulation fails to adequately define what constitutes 
``unlawful Internet gambling'' or ``restricted transaction,'' 
yet requires the financial institutions to make a determination 
on their own about what is lawful or unlawful. If the rule is 
adopted in its current form, the response by many financial 
institutions may likely be to overblock transactions to protect 
themselves from legal liability. Although the regulation does 
provide a safe harbor for financial institutions that block 
transactions that are in fact legal, it does nothing to ensure 
that legal transactions are not blocked. As a result, consumers 
may be placed at risk of having lawful transactions blocked.
    It is easy to see how these regulations, if implemented in 
their current form, could wreak havoc on electronic commerce in 
the United States. With that in mind, I want to take a moment 
to question the priorities reflected by the underlying law, 
which was passed while my party was in the minority, and which 
seeks to eliminate Internet gambling by adults. In my opinion, 
if Congress is going to impose additional regulations on 
financial institutions, our time would be better spent 
restricting payday lending or curbing unfair and deceptive 
practices associated with credit card accounts and other types 
of predatory lending.
    But the reality is, we have a law that requires the 
regulators to develop rules that ban Internet gambling, and I 
have several concerns with the proposed rules. First, I am 
concerned about the effect these regulations will have on the 
remittances system that immigrants use to send billions of 
dollars home each year. Money transmitter companies are already 
having problems maintaining accounts with some banks, and I 
fear that this rule could exacerbate that problem. I am also 
troubled that these regulations could impose significant 
compliance burdens on financial institutions during a time of 
economic and financial turmoil.
    Finally, I believe it is inappropriate to have financial 
institutions essentially acting as final arbiter in determining 
which transactions are legal or illegal, especially when the 
result could be closing a consumer's account. This hearing will 
be an opportunity for the regulators to address these and other 
issues concerning the proposed rules. We will also have the 
opportunity to hear directly from the financial services 
industry on the potential cost, regulatory burden, and 
compliance issues they anticipate if the regulation is 
implemented as proposed.
    I expect a vigorous debate on the issues, and the 
subcommittee looks forward to working with the regulators as 
they move through the process and decide whether to amend the 
regulations or simply roll the dice and adopt them in their 
current form.
    The Chair will now recognize the ranking member of the full 
committee and the author of the legislation, Mr. Bachus, for 5 
minutes.
    Mr. Bachus. Thank you, Mr. Chairman, for holding this 
hearing on the regulatory implementation of the Unlawful 
Internet Gambling Enforcement Act. The title of this hearing 
deals with the regulation proposed by Treasury and the Federal 
Reserve, although I believe also in our minds is Chairman 
Frank's legislation, H.R. 2046, which would effectively repeal 
the ban on illegal Internet gambling that we worked so hard to 
enact. And I believe it of course is also material to today's 
hearing. I know several of my colleagues are pushing for the 
enactment of that legislation if they cannot, what I would 
call, ``water down'' the regulations which have been proposed 
by Treasury and the Fed.
    I have a letter signed by 45 State attorneys general who 
oppose Chairman Frank's H.R. 2046 and also oppose any weakening 
of regulations to implement the Unlawful Internet Gambling 
Enforcement Act. I'm just going to read one quote from a letter 
that they signed. They said:
    ``H.R. 2046 effectively nationalizes America's gambling 
laws on the Internet, harmonizing the law for the benefit of 
foreign gambling operations that were defying our laws for 
years, at least until the Unlawful Internet Gambling 
Enforcement Act was enacted. We therefore oppose this new 
proposal and any other proposals that hinder the rights of the 
States to prohibit or regulate gambling by their citizens.''
    I would like to enter that letter into the record.
    Chairman Gutierrez. Without objection, it is so ordered.
    Mr. Bachus. Thank you. Make no mistake, illegal Internet 
gambling ruins lives and tears families apart. Study after 
study has shown that gambling, Internet gambling, is a scourge 
on our society that leads to addiction, bankruptcy, divorce, 
crime, and moral decline.
    Illegal Internet gambling intensifies the devastation 
wrought by gambling by bringing the casino into the home. 
According to a recent study, 74 percent of those who had used 
the Internet to gamble have become addicted to gambling, and 
many of these gambling addicts have turned to crime to support 
their habit. Research also indicates that in 2006 alone, nearly 
10 percent of college students gambled online.
    Indeed, at our committee's last hearing on this subject, we 
heard testimony from Greg Hogan, whose son was once the 
president of his class at Lehigh University but now sits in a 
Pennsylvania prison after committing bank robbery in a 
desperate attempt to erase his Internet gambling debts. We also 
heard testimony from the NCAA about several college athletes 
who had turned to Internet gambling after betting on football 
games, some of which they were involved in.
    But the harm that illegal Internet gambling inflicts on our 
society extends beyond the personal tragedies of the Hogans or 
other American families like them. Illegal Internet gambling 
also jeopardizes the security of our Nation. The FBI and the 
Department of Justice both testified before this committee that 
Internet gambling serves as a vehicle to launder the proceeds 
of illegal activities, helps fund drug trafficking, facilitates 
tax evasion, and perhaps most frightening of all, can be used 
to finance terrorism.
    To address these harms, this Congress enacted the Unlawful 
Internet Gambling Enforcement Act of 2006. Since its enactment, 
illegal Internet gambling among college-age youth has declined 
from 5.8 percent in 2006 to 1.5 percent in 2007. This is a 
significant achievement. But any success the Act has had in 
decreasing the rate of illegal Internet gambling would be 
short-lived if criminals believe that the Act will not be 
enforced. That is why it is critical that the proposed 
regulations that are the subject of today's hearing be done 
right and implemented without further delay.
    In its current form, the regulations that Treasury and the 
Federal Reserve have proposed require U.S. financial 
institutions participating in designated payment systems to 
prevent transactions in connection with unlawful Internet 
gambling. This requirement is an essential--could I have 
unanimous consent to have one more minute?
    Chairman Gutierrez. Without objection, it is so ordered.
    Mr. Bachus. Thank you. This requirement is an essential 
first step, but it is worth emphasizing that all forms of 
payment should be covered, because a single exemption leaves 
the law suspect to evasion. The proposed rules provide 
exemptions for U.S. financial institutions that participate in 
designated payment systems if the regulators jointly determine 
that it is not reasonably practical for these firms to prevent 
illegal transactions. This exemption ensures that the financial 
institutions are not burdened with implementing impossible or 
impractical standards, but the rules should make clear that 
exempted financial institutions that do become aware of 
restricted transactions should be required to block them.
    Thank you again, Mr. Chairman, for holding these hearings 
and for our witnesses.
    Chairman Gutierrez. You are very welcome, Mr. Bachus. I 
recognize the chairman of the full committee, Mr. Barney Frank.
    The Chairman. Mr. Chairman, the ranking member is correct 
in saying that I opposed this bill and would like to see it 
repealed--not the bill, the underlying Act that these 
regulations implement. I think it is an intrusion into personal 
liberty motivated by the fact that a majority of members 
dislike the purposes to which the liberty is being put. But 
that does not mean there is no separate issue regarding 
regulation. I would urge Members on all sides to contemplate 
the arguments that are being made.
    First, as to the attorneys general, let me say that we 
thought we had preserved States' rights in the bill. We have 
written to them and told them we would be glad, those of us who 
sponsored the underlying repeal bill, to make clear that the 
States have that right. But beyond that, what they are 
objecting to is something that I thought many members of this 
committee supported, namely, uniform rules on the Internet. So 
understand the principle that is involved here and the 
precedent that is being set, namely, if Members of Congress 
have a moral objection, we can intrude on the freedom of the 
Internet and we can tell people what they can and cannot do on 
the Internet.
    Now I had previously understood that to be something that 
Members didn't support, and which States have said, well, we 
want to be able to collect sales taxes. I have been all for 
letting the States collect sales taxes through the Internet. I 
cannot see what the intellectual and principal difference is 
between saying that the States are wholly in charge of whether 
or not individuals choose to gamble, but they have no say about 
whether or not the sales tax can be levied. So you are setting 
the precedent of a federalization of the Internet based on the 
moral views of Members of Congress.
    Now I understand that some people abuse gambling. Some 
people abuse video games. Some people abuse alcohol. Some 
people abuse a lot of things. The notion that a society 
prohibits most people from doing something because a small 
percentage abuse it, I had never thought to be the guiding 
principle.
    But then we get to the question of the regulations, and 
here the argument appears to be that given the importance of 
the underlying objective, let's not pay any attention to 
whether the regulations are burdensome or not. Again, that is 
not a position that I thought many of my conservative friends 
adhered to. What we are being told in effect is, well, forget 
about whether or not the regulations are burdensome or 
inefficient. Virtually every sector of the economy affected by 
these regulations has complained about them.
    The Federal Reserve in testimony, and I appreciate their 
candor, says: ``This is a challenging task. The ability of the 
final rule to achieve a substantial further reduction is 
uncertain. Our objective is to craft a rule to implement the 
Act as effectively as possible in a manner that does not have a 
substantial adverse effect on the efficiency of the nation's 
payment system.''
    This didn't come from gamblers. This came from the Federal 
Reserve. And are we to say that, given the overriding 
importance of the moral objection many Members have to 
gambling, we will therefore go forward with regulations no 
matter how much they might intrude on the efficiency of the 
system? Well, that is not a great precedent to set. It does 
seem to me that it is important to say there is the objective 
and then there is a separate question as to the regulations.
    Now I am of the view, and there are two separate questions 
here, that the manner in which the Congress has chosen to 
outlaw gambling is the wrong one. That is, we have an objection 
to gambling, and we have enlisted the payment system and the 
banks of America to be our anti-gambling cops, to the 
detriment, I believe, of their ability to carry on their 
important financial intermediation function. Maybe it was to 
try and get it into this committee. I know the former chairman, 
the gentleman from Iowa, my predecessor, who is ranking member, 
the gentleman from New York, they really didn't like gambling, 
and they wanted our committee to be the one that drove the 
stake through its heart. But I think that was an error.
    I think it was--and, again, I am not in favor of banning 
gambling. I did not come here to tell other people what to do 
with their leisure time. But even those of you who do feel 
confident in your ability to supervise the leisure activities 
of other adults ought to find a way to do it directly without 
drafting the financial system of this country and putting it in 
the service of your moral objections. And I believe that the 
difficulties we are seeing in enforcing the regulation are not 
due to any shortcomings on the part of those doing it. I think 
the Federal Reserve and the Treasury are doing their best. We 
just gave them the wrong job.
    Again, if you want to get rid of gambling, find some other 
way to do it, but don't impose--and, look, the Federal Reserve 
is not given to hyperbole. When the official statement of the 
Federal Reserve System is we are trying ``to craft a rule to 
implement the Act as effectively as possible in a manner that 
does not have a substantial adverse effect on the efficiency of 
their payment system,'' that means that this could very well be 
an adverse effect. They don't deal with chimera.
    So what we are apparently being told is, well, a little 
adverse effect on the payment system is worth it because we 
will feel so much better when we stop people from gambling. I 
do disagree with the underlying objective of the Act. But even 
those who agree with it ought to be willing to say, you know 
what, let's find a different way to enforce it. Let's not 
burden the important payment system by doing it this way.
    Chairman Gutierrez. All time has expired on our side. I 
have a list handed to me by the staff of the minority, and 
without objection, I will follow this: Representative 
Hensarling of Texas for 2 minutes; 1 minute to Representative 
Davis of Kentucky; and I would ask for unanimous consent of the 
members of the subcommittee to allow Representative King 1 
minute. Without objection, that--
    The Chairman. Reserving the right to object, you never know 
when you are going to want something from the Governor of New 
York, so I won't object.
    [Laughter]
    Mr. Bachus. You mean if I object, he doesn't get--
    Chairman Gutierrez. That's true, Mr.--
    Mr. Bachus. Well, I guess I don't object.
    Chairman Gutierrez. Okay. Representative Hensarling for 2 
minutes.
    Mr. Hensarling. Thank you, Mr. Chairman. I doubt I will 
need the entire 2 minutes. Clearly, many interesting and 
important issues are presented by the Unlawful Internet 
Gambling Enforcement Act, but I just want to make one brief 
point. And that is, if Congress passes a law that the Federal 
Government itself finds difficult or impossible to enforce, and 
turns to private enterprise to essentially enforce that law for 
them, then we must have clarity in our regulatory framework. We 
need black and we need white; we don't need shades of gray.
    I think that a lot of very important issues have been 
raised during the comment period on these regulations. And 
having been a small businessperson before I came to Congress 
and not being able in my own small business to afford an army 
of attorneys, I know what happens is, the businesses tend to 
get risk-adverse. When you're dealing in shades of gray, you 
get very risk-adverse, and I do want to make sure that as 
Congress tries to single in on one type of criminal behavior 
that lawful commerce is not unduly burdened. I'm not sure that 
these proposed regulations have met that mark, and so I would 
hope that at the end of the day, we could at least have 
regulatory certainty for all the legitimate businesses out 
there in this space if we're expecting them to essentially do 
the job of law enforcement that the Federal Government finds 
difficult or impossible to do.
    With that, Mr. Chairman, I yield back.
    Chairman Gutierrez. The gentlewoman from California, Maxine 
Waters, is recognized for 3 minutes.
    Ms. Waters. Thank you so much, Mr. Chairman. I'm looking 
forward to today's testimony on the proposed regulations to 
implement a bill that was passed out of both the Financial 
Services and Judiciary Committees last session, the Unlawful 
Internet Gambling Enforcement Act. By addressing only Internet 
gambling that was already unlawful, the legislation passed last 
session was a bipartisan effort to enhance enforcement by 
cutting off the flow of revenue to illegal enterprises. The 
bill prohibited the receipt of checks, credit cards charges, 
electronic funds transfers, or similar transactions by such 
unlawful businesses.
    I served on this committee and the Judiciary Committee and 
I voted in each committee to report the bill to the House after 
vigorous and passionate debate. When the measure was considered 
on the Floor as a stand-alone bill, I voted for it. I also 
voted for it after it was added to the Safe Ports Conference 
Report, which was ultimately signed into law. Now some have 
noted that the bill passed in the dead of night, and it's true 
that it was very late at night, but the final vote was 409 in 
favor, and only 2 votes against.
    Today I'm not so sure how I would vote on this bill. I have 
certainly been challenged by my friend, Barney Frank, and he 
pushes a particular button with me when he talks about 
legislating morals or vices without infringing on fundamental 
rights. Supporters of the bill stressed that the compromise 
language that emerged from the two committees was the product 
of 10 years of hard work by a very unusual alliance of 
organizations and competing interests, from religious 
organizations like the United Methodist Church, to professional 
sports organizations like the National Football League.
    One of the reasons I am really reconsidering my vote on 
this legislation is because some of those organizations that 
are in such strong support of the bill are organizations that I 
have reviewed very carefully, and I'm wondering about some of 
their decisions in the way that they manage their own business, 
and whether or not there are some questions of morality in the 
way that they treat some of those in their organization.
    So, again, I'm very seldom in a position where I change my 
vote, but this may be one of those times. But let's see what 
today's testimony will bring. I yield back the balance of my 
time.
    Chairman Gutierrez. I thank the gentlewoman. I recognize 
Congressman King of New York for 1 minute.
    Mr. King. Thank you, Mr. Chairman. Thank you for extending 
the courtesy to me to sit here today, and I thank Ranking 
Member Bachus for withdrawing his objection to my appearance.
    Very seriously, like Chairman Frank, I am a co-sponsor of 
H.R. 2046, because I believe it has protections built into it 
which would address the concerns that Congressman Bachus has 
raised, for the purpose of today's hearing is on the 
regulations. My concern is the unintended consequences that can 
and often do result when we ask financial regulators to in 
effect interpret laws for Congress and enforce morality for 
Congress.
    I think if we're talking about sports gambling, that's one 
thing. But to be asking regulators to define what is unlawful 
conduct, what is unlawful gambling, to me really runs a severe 
risk of going too far. And this is an issue I think which 
brings people from all sides together. Just the other day I 
received a letter--in fact, just today, from Grover Norquist, 
president of Americans for Tax Reform, where he expresses 
severe concerns about the implications of this rule in terms of 
personal freedom, personal privacy, and regulatory burden on 
the banking industry and international trade.
    So I think going ahead with these regulations poses real 
dangers. I don't know why we just don't confine it to sports 
gambling and leave it at that for now. And I would ask, Mr. 
Chairman, for unanimous consent to place in the hearing record 
a statement for the hearing by one of our on-leave members of 
the committee, Representative Sessions from Texas, with a 
letter from Mr. Sessions and other members, the Secretary of 
the Treasury and Chairman of the Federal Reserve.
    Again, I thank you for allowing me to be here today. I'm a 
member of the full committee but not the subcommittee. I look 
forward to the testimony, and, again, I just want to express my 
concern that these regulations, as they go forward, could 
really have unintended consequences that all of us would rue in 
the future, and I ask unanimous consent to insert the statement 
in the record. I yield back.
    Chairman Gutierrez. Without objection, it is so ordered. 
Representative Davis of Kentucky for 1 minute.
    Mr. Davis. I would like to thank you, Mr. Chairman, for 
allowing me to participate briefly and also Ranking Member 
Bachus. What I would like to do is ask unanimous consent to 
place in the hearing record comments submitted by the National 
Thoroughbred Racing Association, a critical part of the 
Commonwealth of Kentucky's economy, for some perspective 
related to the discussions that we are going to be having 
today, and I yield back the balance of my time.
    Thank you.
    Chairman Gutierrez. We are pleased to have with us on the 
first witness panel representatives from the Board of Governors 
of the Federal Reserve System and the U.S. Treasury Department. 
Testifying on behalf of the Federal Reserve Board is Louise L. 
Roseman. Ms. Roseman is Director of the Board's Division of 
Reserve Bank Operations and Payment Systems. Appearing on 
behalf of the Treasury Department is Deputy Assistant Secretary 
Valerie Abend. Ms. Abend is the Deputy Assistant Secretary for 
Critical Infrastructure Protection and Compliance Policy.
    Director Roseman, you may proceed.

 STATEMENT OF LOUISE L. ROSEMAN, DIRECTOR, DIVISION OF RESERVE 
BANK OPERATIONS AND PAYMENT SYSTEMS, BOARD OF GOVERNORS OF THE 
                     FEDERAL RESERVE SYSTEM

    Ms. Roseman. Chairman Frank, Chairman Gutierrez, Ranking 
Member Bachus, and members of the subcommittee, I am pleased to 
appear before you today to discuss our efforts to implement the 
Unlawful Internet Gambling Enforcement Act.
    As you are aware, the Act requires designated payment 
systems to establish reasonable policies and procedures to 
prevent transactions to fund unlawful Internet gambling 
activity. Congress recognized, however, that it may be 
difficult for certain payment systems to prevent restricted 
transactions and required the agencies to exempt payment 
systems from the rule's requirements if it was not reasonably 
practical for them to comply.
    The commenters to the proposed rule highlighted a number of 
the limitations in using the payment system to combat unlawful 
Internet gambling activity. The most prominent concern, as was 
discussed here this morning, was the lack of clarity as to what 
forms of Internet gambling are unlawful, and therefore what 
payments need to be blocked. The proposed rule, like the Act 
itself, doesn't spell out which gambling activities are 
unlawful, but rather relies on the underlying substantive 
Federal and State laws. Unfortunately, the activities 
permissible under these laws are not well settled, and they are 
subject to varying interpretations.
    Congress itself recognized this fact when it excluded from 
the definition of unlawful Internet gambling activity allowed 
under the Interstate Horse Racing Act, but included a sense of 
Congress that the horse racing exclusion is not intended to 
resolve any existing disagreements over how to interpret the 
relationship between the Interstate Horse Racing Act and other 
Federal statutes. Commenters stressed that uncertainty such as 
this would make compliance with the rule very difficult. We are 
considering modifications to the rule that would provide 
greater certainty to payment system participants, but our 
ability to provide complete certainty is limited given the 
ambiguities of the underlying statutes.
    The second challenge, as our proposed rule acknowledged, is 
that most payment systems don't have the functional capability 
to identify and block payments made for specific purposes or 
initiated in specific ways, such as over the Internet. In our 
view, the institution that has the customer relationship with 
the Internet gambling business is in the best position to 
determine the nature of that customer's business and whether 
the customer is likely to receive restricted transactions for 
credit to its account. Therefore, with respect to domestic 
transactions, the proposed rule exempted all participants in 
the check, ACH, and wire transfer systems except for the 
participant that has that customer relationship.
    Bank commenters generally indicated that they could perform 
due diligence on their business accountholders at the time of 
account opening, assuming they could readily determine which 
forms of Internet gambling activity are unlawful. Large banks 
in particular believed that it would be quite burdensome, 
however, to determine which of their many existing business 
customers engage in Internet gambling because they have not 
retained records in a manner to enable them to identify 
customers by line of business.
    We recognize, however, that most Internet gambling 
businesses are based outside the United States and generally 
have offshore banking relationships. This poses additional 
practical limitation on the ability of the U.S. payment system 
to block restricted transactions, particularly if made by 
check, ACH, or wire transfer. In such cases, we proposed 
placing the compliance responsibility on the U.S. payment 
system participants that send transactions to or receive 
transactions from foreign institutions.
    Commenters stated that measures U.S. banks could take to 
prevent foreign banks from sending restricted transactions 
would likely be unworkable. Foreign banks generally have legal 
obligations in their own countries to prevent financial crimes 
such as money laundering or terrorist financing. However, 
foreign banks have little incentive to identify or prevent 
Internet gambling activity, which is generally permissible 
outside the United States. There may be few options for dealing 
with restricted transactions through international banking 
relationships without significantly disrupting cross-border 
payment flows.
    In closing, I would like to note that funding unlawful 
Internet gambling activity through the U.S. payment system has 
become more difficult in recent years, due in large part to 
steps card issuers and money transmitters have already taken on 
their own initiative to prevent these transactions. The extent 
to which the final rule can substantially further restrict the 
use of the U.S. payment system for unlawful Internet gambling 
is uncertain.
    Together with the Treasury, we are carefully considering 
all comments received and assessing what changes we should make 
to the rule to implement the Act as effectively as possible 
without having a substantial adverse effect on the Nation's 
payment system.
    I would welcome any questions you may have.
    Thank you.
    [The prepared statement of Ms. Roseman can be found on page 
95 of the appendix.]
    Chairman Gutierrez. I thank you very much.
    Ms. Abend, please.

  STATEMENT OF VALERIE ABEND, DEPUTY ASSISTANT SECRETARY FOR 
CRITICAL INFRASTRUCTURE PROTECTION AND COMPLIANCE POLICY, U.S. 
                   DEPARTMENT OF THE TREASURY

    Ms. Abend. Chairman Frank, Chairman Gutierrez, Ranking 
Member Bachus, and members of the subcommittee, it is my 
privilege to appear before you today to discuss the Unlawful 
Internet Gambling Enforcement Act of 2006.
    The Act was fashioned to require payment systems to 
interdict 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. It also requires that payment systems or 
portions of payment systems be exempted in situations in which 
it would not be reasonably practical for payment systems to 
prevent or prohibit unlawful Internet gambling transactions.
    On October 4, 2007, the Treasury Department and the Federal 
Reserve Board, after consultation with the Justice Department, 
published a Notice of Proposed Rulemaking seeking public 
comment. Our goal when writing this proposed rule was to 
faithfully adhere to the mandate set forth by Congress in the 
Act. The comment period closed December 12, 2007.
    We received more than 200 comments from a diverse group of 
interests, including entities potentially subject to the 
proposed regulations, individuals and groups supportive of 
Internet gambling, individuals and groups opposed to Internet 
gambling, and others.
    We are currently reviewing each comment closely, and 
analyzing the issues presented. Many comments present more than 
a single issue, and certain issues require additional research.
    Some of the comments address the meaning of statutory 
definitions provided by Congress, the applicability 
requirements to portions of designated payment systems, and the 
impacts this proposed regulation could have in the event it 
were to be finalized as proposed.
    Crafting such a joint rulemaking requires extensive 
coordination. We have been impressed with the quality of the 
comments provided and with the effort and expertise employed in 
the development of many of those comments.
    An overarching goal for our efforts has been to closely 
adhere to the statutory instructions provided to us by 
Congress. The Act requires designation of payment systems that 
could be used in connection with unlawful Internet gambling. 
Such a designation makes the payment system and financial 
providers participating in the system subject to the 
requirements of the regulations. The proposed rule designated 
the following five payment systems:
    (1) Automated Clearing House Systems;
    (2) Card Systems;
    (3) Check Collection Systems;
    (4) Money Transmitting Businesses; and
    (5) Wire transfer Systems.
    The proposed rule partially exempts certain participants 
within some of the designated payment systems from having to 
establish reasonably designed policies and procedures. The 
Treasury and the Federal Reserve Board determined that this was 
the most appropriate way to implement the Act while retaining 
fidelity to the intent of Congress.
    Under the proposed rule, the gambling business's bank would 
not be 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. The proposed 
exemptions generally extend to the gambler's bank.
    The Act further requires providing 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.
    The Treasury, working closely and collaboratively with our 
colleagues at the Federal Reserve Board, is making progress in 
reaching our statutory mandate to promulgate a final rule that 
strictly adheres to the Act. No final decisions have been made 
regarding any aspect of the final rule or the comments 
provided, and we are still considering all aspects of the 
proposed rule. When we publish a final rule, we will of course 
provide analysis of the comments received and the reasons for 
any decisions. We are committed to giving fair consideration to 
all relevant comments as we are working toward promulgation of 
a final rule. We have benefitted from the knowledge and the 
efforts of our colleagues at the Federal Reserve Board and the 
Justice Department as we have proceeded in our consideration 
and analysis.
    Thank you, and I would be happy to answer any of your 
questions.
    [The prepared statement of Ms. Abend can be found on page 
43 of the appendix.]
    Chairman Gutierrez. Thank you, Ms. Abend. I would like to 
ask unanimous consent that the following items be inserted into 
the record: the statement from Professor H.H. Weiler, NYU Law 
School; a letter from Jim Tozzi, Center for Regulatory 
Effectiveness; a statement from Marsha Sullivan, Consumer 
Bankers Association; a letter from Chamber of Commerce; a 
letter from Americans for Tax Reform; a Comment Letter, Office 
of Advocacy, Small Business Administration; a statement from 
Rick Smith, the UC Group; the NAFCU letter; and the Bank of 
America statement of Gregory Baer.
    Without objection, it is so ordered.
    I thank the witnesses. First, I would like to ask the 
Federal Reserve Board, the proposed regulations refer to 
various actions that must be taken when a covered payment 
system ``becomes aware'' that a customer is engaging in 
restricted transactions.
    Numerous commenters raised concerns with this standard, and 
how difficult it would be to apply. What exactly does the term 
``becomes aware'' in the proposed regulations mean?
    Ms. Roseman. Well, that is something, as you mentioned, 
that we did get a number of comments on. Commenters said that 
it would be clearer if the regulation had a standard such as 
having actual knowledge rather than ``becomes aware,'' because 
of the ambiguity on how to apply that other standard. It is 
something that we are looking at as we develop the final 
regulation.
    You had indicated that if an institution ``becomes aware'' 
there are certain required actions they must take. The proposed 
regulation provided examples of different actions that could be 
taken, but we said explicitly that these are examples of 
reasonable policies and procedures, but payment system 
participants would be able to develop alternate policies and 
procedures that may also be deemed reasonable.
    Chairman Gutierrez. Let me ask Ms. Abend, the proposed 
regulations require that when the payment system, again, 
becomes aware that the customers receive restricted 
transactions, it must take certain actions which may include 
closing the customer's account or severing the relationship 
with the customer. There is no further guidance on how many 
transactions it would take for such drastic action to occur. 
But as drafted, it appears that it could be as little as two. 
Are there size or volume thresholds for severing a relationship 
with a customer? If an account is closed, must it remained 
closed? How will disputes be resolved if there is a question as 
to the legality of the transaction or the action of the agency?
    Ms. Abend. Well, Mr. Chairman, I would echo what my 
colleague from the Federal Board has said, which is, first and 
foremost, we did receive these comments about what does 
``become aware'' mean and how should we develop a standard, if 
any, that would apply to ``becomes aware.'' We're still 
considering what to do with respect to that comment.
    We have not come to any sort of final determination of 
whether that is a volume-driven type of transaction or if 
someone were to come and notify them if that would by law 
enforcement or a Federal financial regulator. And so I think 
we're still taking it under consideration about how we would 
answer that comment.
    Chairman Gutierrez. Well, it just appears to me that since 
several months have passed and each of you and the group--I 
mean, both the Federal Reserve and Treasury, have excellent 
people working there, that we would tread carefully as we 
pursue these issues, because many people made the comment, as 
both of you responded. And it seems to me to be a valid area. 
Just what is it you are going to do, and the degree of 
certainty with which you act and which banks and financial 
institutions act are going to be critical to not somehow 
violating the rights of others as we try to police gambling in 
America.
    I have actually not an underlying problem with trying to do 
it, although it is always difficult when you buy lottery 
tickets, and since I am getting to be 54 years old, I get all 
these prospectus all the time and they all tell me, be 
cautious. You have a lot of risk. So I'm getting these 
prospectus all the time from mutual funds and for stocks and 
bonds. And I think they're asking me to gamble each and every 
time, because they're certainly--because of the Federal 
Government and regulations we have taken, there are many 
warnings. And so if because of those warnings, I don't do it. I 
don't know if we can do the same thing with a lotto ticket or 
somebody betting on their favorite college team.
    So, I would just say we look forward to having you back as 
the regulations become more finalized and formalized, because I 
think it's going to be very, very critical that we make sure 
that we do it in a very careful minded way.
    Before I go to Mr. Bachus, I'm going to ask unanimous 
consent that Mr. Davis, who has already participated, be 
allowed to ask questions. And now I have the list from the 
minority, beginning with Mr. Bachus. You are recognized for 5 
minutes.
    Mr. Bachus. Thank you. I appreciate our witnesses 
testifying. I would like to hand you at this time a letter from 
the NFL, Major League Baseball, the NBA, the National Hockey 
League, and the NCAA. And this letter, I think you have had for 
about 9 months. Have you gone over this letter pretty 
carefully?
    Ms. Roseman. Yes. We have been looking at all the comments 
we have received. They have raised issues on many aspects of 
the regulation. The payment system, frankly, isn't well 
designed to be able to identify unlawful Internet gambling 
activity. And that is posing a number of challenges to us, 
along with the uncertainty with respect to what forms of 
Internet gambling should be proscribed by the regulation.
    Mr. Bachus. You know, they point out some interesting 
things; they are telling us that, for instance, you all say you 
can assemble a list of bad actors, and that is impractical. Is 
that--
    Ms. Roseman. In the proposed regulation, we didn't 
explicitly propose a list, but in the supplementary information 
accompanying the proposed rule, we did discuss the pros and 
cons of having such a list, talking about the challenges of 
developing a list, and we asked commenters a number of 
questions with respect to the desirability of having such a 
list in the final rule.
    Mr. Bachus. You know, all of these lists would be of 
illegal gambling operations, many of them offshore. What struck 
me is that our staff did just a cursory study where in at least 
5, but I think as many as 17 cases, you have done that. I guess 
the more recent are the cross-border flow of monetary 
instruments, legislation on that. You didn't have a problem 
with that. The currency transaction reporting requirements, you 
assembled it for that. The Bank Secrecy Act, you do it under 
that. Anti-money laundering statutes, you do it under that. You 
do it under the terrorist financing, and there is not a problem 
there.
    Also, you said that it is not practical for ACH, wire 
transfer, and check system participants to block restricted 
transactions except for those by entities that either have a 
direct relationship with the Internet gambling site or certain 
international payments. But in fact, in all these statutes, and 
in about 12 others, you do that. Do you see what I'm saying? 
So, I mean, I'm somewhat mystified as to why--do you understand 
what I'm saying? I'm just saying that you all do it. There are 
so many cases where you require an institution to do it. They 
do it. They said they--in fact, and another thing, 
Representative Paul Gillmor is dead now, but he pointed out 
that the small banks said they could do this but some of our 
largest, most sophisticated financial institutions said they 
couldn't. That strikes me as incredibly odd. I'm sorry.
    Ms. Roseman. In looking at the list idea, many commenters 
used as analogy the OFAC list. I think the one thing that 
really distinguishes the list here from the OFAC list is that 
OFAC lists particular entities with whom you shouldn't have 
transactions. In this case--
    Mr. Bachus. And the NCAA has identified 900 of those.
    Ms. Roseman. Yes. But in this case, it is restricted 
activity, not restricted parties. So even gambling operations 
may have a combination of payment transactions that would be 
restricted under this law and others that would not be.
    Mr. Bachus. All right. Let me dispute that. We are talking 
about illegal Internet gambling enterprises that are not 
licensed to do business in the United States. Now how could 
they possibly--they are illegal. They are criminal enterprises. 
They are not authorized to do business in the United States or 
transact business.
    Ms. Roseman. The companies that have these businesses may 
also have other commercial transactions that they conduct that 
would be totally unrelated to gambling.
    Mr. Bachus. Well, I understand that, but--
    Chairman Gutierrez. The gentleman's time has expired.
    Mr. Bachus. But if they are doing an illegal enterprise, 
you--and other enterprises if they are doing something illegal, 
they may do something legal, but you block them in all these 
other statutes, because--in fact, you block them because they 
do that.
    Chairman Gutierrez. Ms. Roseman, please answer the 
gentleman's question, and then we will proceed.
    Ms. Roseman. Bottom line, we did get a lot of comments 
about the list. It is something that we are looking at as we 
develop the final rule. As Ms. Abend mentioned, we haven't come 
to any final decisions, but we certainly understand the 
interests of both the financial industry and of the 
professional sports leagues, to have certainty with respect to 
what is lawful and what is unlawful.
    Mr. Bachus. Yes. And I--
    Ms. Roseman. But we understand the objective.
    Mr. Bachus. I guess my point is, saying that you can't do 
something you're doing in 17 other statutes is sort of unusual.
    Chairman Gutierrez. The gentleman's time has expired. 
Chairman Frank.
    The Chairman. Well, to begin, we are prepared in the 
language to exempt the sports leagues. We already allow them 
to. But as I understand it, what they are apparently telling 
you is that they, as I read their letter, that the gentleman--
they want these regulations as proposed adopted, and what they 
are saying is, because there might be some problem with their 
business, even though they could be exempted, they are 
insisting that regulations be adopted that all of those on whom 
they would fall would find very burdensome. Their total lack of 
concern for the payment system, for the legitimate arguments 
raised by the others, is troubling.
    But I'm particularly intrigued by the question of horse 
racing. And I admit that I am not a Biblical scholar, and I 
often am unable to follow some of the distinctions that 
Biblical scholars make. The one I have been struggling with is 
in all of the moral teachings about gambling--you know, I have 
this problem with regard, for instance, to conservative 
economics, free market, free enterprise--I have not yet found 
the footnote that says except agriculture, that many of my 
conservative colleagues believe deeply.
    Similarly, I can't find the exemption for horse racing in 
all of the anti-gambling morality, or in the statistics on 
people being addicted. But as I understand it, we did get a 
letter from the gentleman from Kentucky urging that you make 
clear that we are exempting horse racing, and I thought betting 
on a horse was gambling. Apparently, betting on a horse is not 
gambling. Perhaps it is animal husbandry, I don't know.
    But let me ask you, because one of the problems we have is 
uncertainty. And there is really a rather extraordinary 
provision in this law that says nothing in this bill--this is 
the underlying law the gentleman from Alabama sponsored--there 
is a provision that says nothing in this law will resolve the 
uncertainty as to whether or not it covers horse racing. 
Really, a rather bizarre piece of legislation. Congress says 
Congress cannot make up its mind about the conflict. But let me 
ask you, with regard to people who gamble through the Internet 
on horse racing, in States where that is not legal, is that 
banned or not banned, according to the regulation? Let me ask 
each of you.
    Ms. Roseman. Well, in our consultations with the Department 
of Justice, their belief is that it is illegal in all States 
irrespective of whether the individual State has banned it or 
not.
    The Chairman. But does the regulation say that?
    Ms. Roseman. The proposed regulation did not say that 
because we did not go down the road of trying to resolve the--
    The Chairman. Well, say I'm a bank, and I get this 
processing request for someone who made a bet on a horse race. 
Do I accept it or do I reject it? According to the regulation.
    Ms. Roseman. That was the biggest comment we received.
    The Chairman. Well, I understand that, but I didn't ask you 
how many comments you received. What do I do? I'm a nice little 
bank here, and I don't want to, you know, I say, well, look, 
I--you know, who am I to counteract the great morality of that 
wonderful Congress that tells everybody how to live a good 
life? And how do I interfere? So now somebody wants to make a 
bet on a horse. Do I allow that bet to be paid, or do I not? 
You have made the regulations.
    Mr. Bachus. I would allow you to do it.
    The Chairman. Well, I didn't yield.
    Mr. Bachus. I would let you bet.
    The Chairman. I didn't yield to the gentleman, and if the 
gentleman wants to make a clarification, he ought to do it in 
the law, this law that he helped to pass, that says we don't 
know. I guess they're against gambling except that the bank has 
to gamble. But I do want to ask the question. Under the 
regulations as proposed--they may be amended--I am a financial 
institution. Do I or do I not process that payment for a bet on 
a horse?
    Ms. Roseman. I would assume that most institutions would 
not process--
    The Chairman. No, no. I'm not asking you to assume what 
they would do. You're the regulator. And I understand you 
didn't write this silly business, and don't take it personally, 
but you have this responsibility. When the lawyer calls you and 
says, okay, counsel to the Fed, counsel to the Treasury, I have 
a very law-abiding client here. What should she do? Should she 
process this payment? Or if she processes the payment, is she 
violating the law? What is the answer?
    Ms. Roseman. Unfortunately, the proposed regulation was 
silent on that issue, and I think that is something we are 
going to need to look at for the final regulation.
    The Chairman. So the answer is to gamble on it?
    Ms. Roseman. That is essentially what--
    The Chairman. And our friends at the NFL and the AFL, etc., 
have said--no, the NFL and the major leagues--you go ahead and 
do it. So we are telling the entire payments--the entire 
financial structure of America that whether or not--and I would 
guess that betting on horses is a substantial part of 
gambling--I think that is the greatest abdication of 
responsibility that I can think of for Congress to foist that 
set of choices and ambiguities on the system.
    Thank you, Mr. Chairman.
    Chairman Gutierrez. Thank you. Mr. Marchant is recognized 
for 5 minutes.
    Mr. Marchant. Thank you, Mr. Chairman. Ms. Roseman, I have 
heard you say that these are not the final rules and that all 
of the comments will be taken into consideration. Will the 
final rule define unlawful Internet gambling?
    Ms. Roseman. I can't say at this point exactly what is 
going to be in the final rule. The challenge we have is 
interpreting something--particularly Federal laws where 
Congress itself isn't sure what they mean, and then trying to 
figure out ourselves how to interpret them. That is something 
we are really struggling with at the moment.
    Mr. Marchant. Is it your feeling that Federal law is clear 
on what unlawful Internet gambling is?
    Ms. Roseman. No, I don't think it is. I think that there 
are different Federal laws that interact with each other, and 
that is creating the challenge.
    Mr. Marchant. But there are--States are more clear on their 
laws as far as what--
    Ms. Roseman. States with respect to truly intrastate 
activity. What we're talking about with the horse racing would 
be interstate.
    Mr. Marchant. If the regulators cannot, and it doesn't 
sound like they're optimistic that they can define what 
unlawful Internet gambling is, how will my bank in my hometown 
know what it is when they see that transaction?
    Ms. Roseman. I suspect that they would take a conservative 
approach and assume that all Internet gambling is unlawful.
    Mr. Marchant. What if the transaction is wrapped in the 
appearance of another type of transaction? What if you are 
placing your bet at Joe's T-Shirt Shop in the invoice and all 
the transaction reflects is a purchase and a transaction with 
Joe's T-Shirt Shop?
    Ms. Roseman. In that case, payment system participants 
would have no way of knowing that the transaction actually 
related to unlawful Internet gambling and would likely process 
the transaction.
    Mr. Marchant. And there would be no penalty in that 
instance for that financial institution?
    Ms. Roseman. I would think not. They would have no way to 
have flagged that transaction as having been unlawful.
    Mr. Marchant. So isn't it likely that in response to--and I 
would like for you to contemplate this in the final rules--
isn't it likely that as nimble as the Internet is, and as 
resourceful as the Internet gambling industry is, that they 
will adopt a mechanism to make no transaction appear to look 
like an Internet gambling transaction?
    Ms. Roseman. I think there is this risk, depending on how 
the rule works. In the proposed rule, there was some 
responsibility placed on the bank that held that company's 
banking relationship. So if the bank that had the business 
relationship with Joe's T-Shirt Shop started seeing a pattern 
of transactions that seem unusual for that business, it may 
want to probe further about what is happening. Or if a bank 
that signed that business up accepts credit cards, and it used 
a regular retailer merchant category code rather than the 
gambling merchant category code, if the bank was aware of what 
the true activity was, it would have a responsibility to do 
something about it.
    Mr. Marchant. Yes. I just, a month or so ago, had my credit 
card number used, and I discovered within about 30 days that 
there are hundreds of different mechanisms and false companies 
and companies that sell no products, companies that have 
nothing--no purpose whatsoever except to process stolen credit 
card numbers through, and of course my credit card company was 
very good about being able to recognize that after the fact. 
But it was from me prompting them and calling them and saying, 
you know, I don't buy--I really didn't buy anything at Bloomin' 
Candles in Minnesota. But if you don't have the proactivity on 
the part of the customer and you are solely dealing with the 
Internet provider, of the Internet, then I would like for you 
to contemplate this part of it in your final rules.
    Chairman Gutierrez. The gentleman's time has expired. Mr. 
Clay is recognized for 5 minutes.
    Mr. Clay. Thank you, Mr. Chairman. Let me start with Ms. 
Abend. The Administration and some of my colleagues have been 
adamant that we cannot overburden the banking sector with laws 
and regulations governing community lending, governing 
unscrupulous lending practices and other policies designed to 
help and protect people. Does it not seem incongruous that 
against the backdrop of the subprime crisis and all of the 
other challenges faced by the banking industry that we would 
impose this additional burden on the banks?
    Ms. Abend. Well, Congressman, you know, certainly the 
current market conditions are the number one priority facing 
the Secretary and certainly is where our attention is being 
spent, but with regard to this particular proposed rule, we are 
carrying forth, as we are required by statute, to implement 
proposed regulations and ultimately a final regulation adhering 
very closely to the statute that was provided to us. So we're 
just following what we had to do as required by mandate.
    Mr. Clay. Well, let me ask you, how realistic is it that 
authorities can actually police Internet gambling, that they 
can actually enforce this law, that they could stop the scourge 
of Internet gambling? How realistic that we are going to be 
effective in that process of stopping Internet gambling?
    Ms. Abend. Well, I think we certainly proposed a rule that 
we thought very much adhered to what the sense and the intent 
of Congress was to try and stop the illegal activity and the 
illegal transactions. I'm sure that there's no regulation today 
on anything that is 100 percent possible at blocking all of the 
illegal activity, but it is, we hope, our final rule will be a 
strong deterrent.
    Mr. Clay. Well, but I can see us getting into a lot of 
discretionary decisions, a lot of judgment calls on the part of 
the regulators and the banks, especially when you look at this 
confusing chapter in the law about horse racing. I'm not even 
sure does it exempt horse racing, does it not?
    And then we have requests from the major sports leagues who 
also want to be exempted, but they didn't include the fact that 
they are already conducting gambling over the Internet through 
Sportsbooks, through Las Vegas casinos and others. Sportsbooks 
take bets on all kinds of professional games, and college 
games. So how do we--how will we separate this and actually 
enforce it?
    Ms. Abend. Well, Congressman, I think as you have heard 
from my colleague from the Federal Reserve Board, this issue of 
clarity, which we received so many comments about on all sides 
of the issue, some proposing that we clarify what is legal or 
illegal gambling, others proposing if we produced a list, that 
is something that we, as my colleague, Louise, has said, from 
the Federal Reserve Board, are struggling with and trying to 
figure out what if anything we can do.
    I certainly would also mention that in our consideration, 
we are, as required by the statute, consulting with the 
Department of Justice, who truly are, from a Federal 
standpoint, more of the experts when it comes to the statutory 
Federal definitions of legal and illegal gambling.
    Mr. Clay. Okay. Ms. Roseman, any comments on how we can 
effectively enforce the statute?
    Ms. Roseman. I think it is going to be very difficult to 
enforce. The implementing regulations will not be ironclad. It 
will be very difficult to totally shut off the payment system 
for use in unlawful Internet gambling. As was mentioned 
earlier, companies could disguise the purpose of the 
transaction. In many payment systems, the purpose isn't even 
included in the payment that flows through the financial 
industry to begin with.
    Mr. Clay. So the law doesn't have teeth to begin with. It's 
just a statement, more of a statement from this body than 
anything else?
    Ms. Roseman. I think the law is relying on the payment 
system--
    Mr. Clay. I'm going to stop you there and yield the rest of 
my time--
    The Chairman. Let me just ask, on the--if I could briefly, 
on the question of confusing. I have been informed that the 5th 
Circuit in 2002 ruled that horse race gambling was legal. So in 
the interpretation, would it make any difference if I were a 
bank in the 5th Circuit or elsewhere? Now I know the Justice 
Department doesn't agree with the Fifth Circuit.
    Mr. Bachus. Point of order.
    Chairman Gutierrez. The gentleman will state his point of 
order.
    Mr. Bachus. I have no problem with the chairman asking this 
question, but I would also ask for equal time.
    The Chairman. Well, that wouldn't be a point of order, I 
guess. The gentleman didn't object to my asking the question as 
long as he didn't think it was a tough question, so I'll 
withdraw it and ask it later.
    Chairman Gutierrez. Mr. King, you are recognized for 5 
minutes.
    Mr. King. Thank you, Mr. Chairman. Thirty years ago I was 
general counsel to a government-run off-track betting 
corporation in New York, and we were going through a number of 
similar legal issues. That was 30 years ago. I don't know how 
much progress we have made since then as to what can be done 
and not done, but let me just follow up on what Congressman 
Clay said. And I'm not trying to really be trivial in saying 
this, but with everything facing Chairman Bernanke and 
Secretary Paulson and revamping the regulatory structure in a 
way that it hasn't been done in over 70 years, to be putting 
this much effort into something which even the greatest minds 
in Congress cannot define when it comes to illegal gambling, I 
wish you well on that.
    But very seriously, I think your testimony, and I really 
appreciate your testimony, and I appreciate your honesty on it, 
and the questions that are coming show to me either the 
impossibility of coming up with adequate regulations or 
meaningful regulations based on the legislation, or coming up 
with regulations which could have the most dire unintended 
consequences with severe impact on the financial services 
industry.
    I would just propose, and I'm probably not going to use all 
my 5 minutes, but since there does seem to be a consensus, 
including from sports itself, would it make sense to go ahead 
with regulations dealing with sports and then either put the 
other aside or allow an administrative law judge to look at it, 
but at least go ahead with the regulations as it applies to 
professional and intercollegiate sports?
    Ms. Roseman. The challenge is many Internet gambling Web 
sites, I believe, have a combination of sports gambling and 
other types of gambling done by the same company. So, again, by 
the time the transaction gets into the payment system, it would 
be very difficult for the financial industry to know what type 
of gambling the payment related to.
    Mr. King. Okay. I don't have the same ability as the 
chairman of the committee to express outraged hyperbole, but if 
even on something which everyone agrees is illegal and everyone 
agrees should be controlled, and if that can't be done, doesn't 
that just show almost the impossibility of coming up with 
regulations that would cover an area which no one has been able 
to fully define?
    Ms. Roseman. It does point out that problem. If Congress 
were to say that any transaction involving a company that had 
sports betting would be prohibited, that would be somewhat 
different than prohibiting just the sports betting itself, 
because the financial industry wouldn't be able to determine 
the purpose of variuos transactions involving that company.
    Mr. King. I see. Ms. Abend, do you have any comments?
    Ms. Abend. I just concur with what my colleague from the 
Federal Reserve Board has said, that it is difficult to 
separate out the differences between, you know, whether it is a 
sports transaction or some other type of transaction. And, 
obviously, we have to adhere to what Congress gave to us. So 
we're just following exactly what we were provided, and there 
is no provision there really to do with that.
    Mr. King. Okay. Thank you. I yield back.
    The Chairman. Will the gentleman yield to me for one--just 
briefly?
    Mr. King. If it's appropriate, I would yield.
    The Chairman. Yes. I just--let me say, I had one question 
based on the line of questioning from my colleague from Texas, 
Mr. Marchant. You mentioned that there might be a disguise, 
they might say Joe's T-Shirt Shop, etc. There are penalties for 
the financial institutions here. Under the regulations, would a 
financial institution be under any affirmative obligation to 
uncover a pattern that might suggest fraud?
    Ms. Roseman. Under the proposed regulations, we said that 
the banks that had the customer relationships with the business 
customers would have to do due diligence to ensure that those 
customers were not conducting restricted transactions through 
their bank. If the pattern of transactions was something that 
would not look anomalous to their cover activity, I'm not sure 
if that is something that the bank would necessarily find.
    The Chairman. Okay. But it's important for you not to 
simply be not sure. We need to know.
    Mr. Bachus. Mr. Chairman, could I respond?
    Chairman Gutierrez. Excuse me. The gentleman--
    Mr. King. If I have any time left, I yield it to the 
gentleman from Alabama.
    Chairman Gutierrez. The gentleman, Mr. King, yields to the 
gentleman from Alabama.
    Mr. Bachus. Thank you. I think a lot of the questions that 
have been posed would be better answered by the Justice 
Department. In fact, Ms. Abend, you said I think on two 
responses that the Justice Department would be better able to 
answer those questions. And for the record, before we adjourn 
this panel, I would like to point out that a number of the 
questions could have been answered by the Justice Department 
and they would have been the appropriate party. And for that 
reason, I, on at least three different occasions, strongly 
urged and requested the committee to invite the Justice 
Department, but that request was not honored.
    Chairman Gutierrez. The recommendation of the gentleman 
will be seriously considered after today's hearing. I assure 
him of that.
    Mr. Bachus. Thank you.
    Chairman Gutierrez. Mr. Wexler is recognized for 5 minutes.
    Mr. Wexler. Thank you, Mr. Chairman. I want to follow 
Chairman Frank's line of questioning and Mr. Clay's line of 
questioning. Unfortunately--you're right. You didn't pass this 
awful law, but you're assigned the responsibility of preparing 
the regulations. The only appropriate response in my view to 
what we're hearing this morning is to undo the Unlawful 
Internet Gambling Enforcement Act in its entirety, and if there 
are industries that wish to be regulated, whether it's sport 
industries or whatever, then engage in a consensus. But the 
idea that we are now taking this law that violates our privacy, 
invades our freedom, and now applying on top of that a set of 
regulations that are inconsistent at best and then ask banks to 
enforce this inconsistency, just exacerbates the situation.
    But let me follow what Chairman Frank was beginning to get 
at, because one of my concerns is the idea that law abiding 
adults who compete against each other in games based on 
individual skill such as poker, why wouldn't they be--or I 
would presume they, too, should be exempt from these 
regulations. Isn't that correct?
    Ms. Roseman. We got a lot of comments from poker players 
who made exactly that argument. The Act's definition of what is 
a ``bet or wager'' includes a game subject to chance. There are 
a number of games, such as poker, that involve a great deal of 
skill but probably are also subject to chance. The Act's scope 
includes games subject to chance. The Act doesn't require a 
predominant element of change, but just that the game be 
subject to chance.
    Mr. Wexler. Well, let's say we are in New Hampshire. If I 
understand the New Hampshire statute, it describes gambling as 
a game of chance where the player cannot affect the outcome. 
Clearly that would not describe poker, as you just described 
it, and I agree with you. If you take the 5th Circuit's 
interpretation of the Wire Act, then wagering on poker in New 
Hampshire is clearly legal. So let's say we are playing poker 
in New Hampshire, we should be exempt, right?
    Ms. Roseman. The Federal Reserve Board is not an expert on 
gambling law. We have in our consultation with the Department 
of Justice asked them this question. They believe poker is 
unlawful under this law. I think that is all I can say.
    Mr. Wexler. Sure. If I understand it correctly with respect 
to the regulations, is it correct to say that each bank would 
have to establish its own policy on what transactions to block 
in compliance and what to permit? And if they got it wrong, 
they would be liable?
    Ms. Roseman. They could either adopt their own policies, or 
they can rely on the policies of a designated payment system 
that they participate in. So, for example, if you are a credit 
card issuer and you rely on the policies of Visa or Mastercard 
to ensure that the transactions coming through will have a 
merchant category code that flags this as gambling and will 
have a code to say that the card was not present when the 
transaction took place, and then you took actions based on the 
card system's policies and procedures, you wouldn't then need 
to go through and develop a--
    Mr. Wexler. But it certainly--
    Ms. Roseman. --on your own.
    Mr. Wexler. It is certainly conceivable that different 
banks or different card systems would have entirely different 
rules for the same transactions?
    Ms. Roseman. In card systems, probably unlikely but 
certainly conceivable.
    Mr. Wexler. Well, Mr. Chairman, if nothing else, I would 
suggest that this hearing illuminates the fact that what the 
underlying bill has established is a totally inconsistent 
system of regulation of law-abiding adults wishing to play 
games such as poker or mahjong or chess.
    If I could ask one other question. In my district, bridge 
is a big game, along with mahjong, along with poker. If a group 
of 78-year-old men and women get together and want to play 
bridge and they pay an entrance fee of $20 and they register 
online and they have to use their credit card, is that 
something that now is going to wind up being a prohibited 
activity?
    Ms. Roseman. I would just be speculating at this point, but 
I'm not sure if the gambling itself would be online. It would 
just be the entrance fee, but I had not considered that 
particular--
    Mr. Wexler. Right. So the majority--the former majority 
should understand what they did when they passed the Unlawful 
Internet Gaming Enforcement Act is that they made criminals out 
of law-abiding Americans who play poker, who play chess, who 
play bridge, or who play mahjong. And this is all in the 
context of a mortgage crisis and a banking crisis in America. 
Thank you very much, Mr. Chairman.
    Chairman Gutierrez. And next we have a member of the 
subcommittee, Mr. McHenry.
    Mr. McHenry. Thank you. I thank the chairman for yielding 
time. You know, looking at the law and listening to your 
testimony, both from my office and then here this morning, I do 
have just a broader question for both of you. Is it the 
construct of the legislation that is the issue on issuing 
regulations and enforcement? Or is it the intent of the 
legislation? Are you saying in terms of your regulatory 
capabilities that even the intent of this bill, which is to 
root out, you know, unlawful forms of gambling, is that 
possible, in your regulatory view? Or is it simply the 
construct of this legislation?
    Ms. Roseman. I think the challenge is a combination of both 
things that you mention. Part of it is the construct of the 
legislation itself that leaves this ambiguity as to what forms 
of Internet gambling are lawful and which are unlawful. Part of 
it, though, is the overall intent by having the payment system 
be the mechanism to combat this unlawful Internet gambling. And 
as I mentioned earlier, the payment system isn't well designed 
for this task, and that's really what we're struggling with.
    Ms. Abend. I would agree with my colleague from the Federal 
Reserve Board that these are incredibly complex issues, and so 
the statute definition which we took whole into our proposed 
regulation creates this problem where we--there is this 
ambiguity that we have seen reflected in the comments that we 
were provided. And, far be it for me to speculate on the intent 
of Members of Congress.
    Mr. McHenry. Okay. All right. Fair enough. That was a very 
simple answer. I think, Ms. Roseman, back to your comment, you 
said that the regulations won't be ironclad. I think that was 
the terminology you used.
    Ms. Roseman. Yes. I meant that I don't think it is 
practical to be able to preclude the payment system from 
processing any unlawful Internet gambling transactions. There 
is going to be a proportion that will go through irrespective 
of our regulation. The question is, how large a proportion.
    Mr. McHenry. Any estimates? Any ideas?
    Ms. Roseman. No. I don't have any estimates on that.
    Mr. McHenry. So is it safe to say that the construct of the 
legislation is such that you are both going to have a very 
difficult time enforcing the legislation we passed? Or is that 
an understatement?
    Ms. Roseman. No. I think it is very difficult without 
having more of a bright line on what is intended to be included 
as unlawful Internet gambling. That's the first challenge. I 
think the second challenge is to figure out how to use the 
payment system to achieve the objective of cutting off the 
unlawful Internet gambling activity.
    Mr. McHenry. Now in terms of your discussions with State 
attorneys general, have they been extensive? Has there been any 
discussion on enforcement of this?
    Ms. Roseman. No. Our discussions have been with the 
Department of Justice, but I do not believe we have talked to 
the State attorneys general.
    Mr. McHenry. Thank you, Ms. Roseman. Ms. Abend?
    Ms. Abend. I am not aware of any conversations that we have 
had with them.
    Mr. McHenry. Okay. Well, thank you for your testimony. 
Thank you, Ms. Roseman.
    The Chairman. Mr. Chairman?
    Mr. McHenry. I would be happy to yield to my colleague.
    The Chairman. Thank you. I just wanted to clarify, when the 
gentleman from Alabama raised the question of the Justice 
Department, as chairman of the committee, it has generally been 
our policy to have before us as witnesses representatives from 
those agencies that come under our jurisdiction. I can't 
remember a time either recently or in prior years when we had 
the head of a different agency before us; it becomes a 
jurisdictional issue. So I understand the concern here, but I 
can't remember an attorney general or a representative of the 
Justice Department ever testifying before us. It is generally 
the case that the committees deal with representatives of the 
agencies that are under their jurisdiction.
    Mr. McHenry. What about the FTC, Mr. Chairman?
    The Chairman. We have partial jurisdiction over the FTC 
statutes. The FTC statutes, for instance, when we did the 
Privacy Act, we gave some duties to the FTC, among others. So 
we, whereas as Members--let me be clear--whenever a question of 
increasing the penalties, for instance, comes up, we don't deal 
with that. We send it to the Judiciary Committee. So we have a 
shared jurisdiction over the FTC.
    Mr. McHenry. I yield back. Thank you.
    Chairman Gutierrez. I thank the gentleman from 
Massachusetts, the chairman, for that clarification. Indeed, 
this bill did go for hearings both before this committee and 
the Judiciary Committee because of the concerns with the 
Department of Justice, and we expect to call them at Judiciary 
to take up the issues with the Department of Justice.
    Again, Federal Reserve and Treasury clearly are under the 
jurisdiction of this committee, and that's why they were called 
forward, as they are bringing all of the comments forward from 
the public.
    I would like unanimous consent to include in the record 
comments from the American Greyhound Track Operators 
Association.
    Without objection, it is so ordered.
    Would the gentlemen present care for a second round of 
questions?
    The Chariman. We have some members who weren't here for the 
first round.
    Chairman Gutierrez. Oh, I'm sorry. Dr. Paul, you are 
recognized for 5 minutes. I am so happy to see you.
    Dr. Paul. Thank you, Mr. Chairman, and I'm sorry I am late. 
I had another hearing. But let me just make a very brief 
statement, and I don't have any particular questions here. But 
I did want to be on record in opposition to the regulations as 
well as the legislation that stands dealing with Internet 
gambling.
    I have always taken the position that though I do not 
endorse gambling per se, people should make their own 
decisions. It's a personal choice. And I have always been 
concerned that this type of legislation and regulation is is 
likely to open the door, as I believe it already has, to the 
control and invasion of the Internet itself. And I think the 
Internet has to be protected.
    But I think that there are decisions that individuals make, 
and they can make mistakes, but I believe those decisions, 
whether it has to do with how they spend their money or what 
they put in their mouths or what they smoke, they do it at 
their own risk. But I also extend that belief to a personal 
belief that in economics, people ought to be allowed to do 
that, too, and spend--and have economic transactions at their 
own risk, and government shouldn't be there to promote virtue 
or ethical standards, and they shouldn't--the government 
shouldn't be there to promote what they see as a fair economy.
    So it's sticking to those principles that government 
interference in this manner usually is not beneficial. I have a 
written statement, Mr. Chairman, that I would ask unanimous 
consent to submit for the record, and I would like to yield 
back.
    Chairman Gutierrez. Without objection, it is so ordered.
    Mr. Sherman is recognized for 5 minutes.
    Mr. Sherman. Thank you. I know the gentleman from Texas is 
dedicated not only to individual liberty but also States' 
rights, and gambling has traditionally been regulated by the 
States. It is not a decision of Congress but technology that 
has undermined that regulation and it is the attempt of the law 
that we are dealing with here today to restore what has been a 
traditional province of the States. I'm sure the gentleman from 
Texas would agree more with the decision of the State 
legislature in Carson City than perhaps the State legislature 
of his own State with regard to whether gambling should be 
allowed.
    The credit card system has been using a coding system to 
block restricted payments for Internet gambling. I wonder if 
the witnesses could respond to why this same system wouldn't 
work for other payment systems.
    Ms. Roseman. The card systems have a very different design 
than other payment systems. The card systems have been designed 
to include a code going along with the authorization request 
that indicates what type of merchant the transaction took place 
at, such as a restaurant, a gaming organization, or an airline.
    If you look at, for example, the check system, there is no 
such code and given the design of the check system, no 
practical way to include such a code. And so I think it would 
be very difficult to extend the concept that is in the credit 
card system to systems such as check system or wire transfer.
    Mr. Sherman. That is a concise and good answer. I thank 
you. One of the serious concerns related to Internet gambling 
is money laundering. Why wouldn't the same procedures used to 
combat money laundering and terrorist financing work to address 
illegal Internet gambling?
    Ms. Roseman. Money laundering is a global concern. Banks 
around the world focus on this issue. Many Internet gambling 
businesses are not in the United States; they are offshore in 
countries where this is activity is permissible. So the banks 
in those countries have no incentive to flag those particular 
transactions because they are legitimate commercial 
transactions--
    Mr. Sherman. So we would be in the position of either 
allowing Internet gambling or cutting our financial ties to 
those small Caribbean countries if we thought it was more 
important?
    Ms. Roseman. And I think it goes beyond just small 
Caribbean countries. There could be Internet gambling activity 
going through major correspondent banks in other countries 
where it would be impractical for U.S. correspondents to cut 
off those relationships, which have substantial international 
payment flows.
    Mr. Sherman. What is the largest country economically that 
allows Internet gambling and that demands that U.S. citizens be 
allowed to gamble over the Internet if the site is located in 
their country?
    Ms. Roseman. That I do not know off the top of my head. I'm 
sorry.
    Mr. Sherman. I yield back.
    Chairman Gutierrez. The gentleman yields back. Are there 
any further members?
    Dr. Paul? Any further questions?
    [No response]
    The Chairman. If I could just get an answer to the question 
about whether or not it makes a difference if you're in the 5th 
Circuit, because the 5th Circuit did in 2002 give a ruling on 
the legality of some horse race betting. I know Justice doesn't 
agree. Under the regulations, would it make any difference if I 
were a financial institution in the 5th Circuit or if the 
activity happened in the 5th Circuit?
    Ms. Roseman. If you're talking about horse racing--
    The Chairman. Yes.
    Ms. Roseman. In our regulation, we did explicitly exclude 
horse racing permitted under the Interstate Horse Racing Act, 
as did the Act itself. We just did not define--
    The Chairman. Well, I understand that. But the Justice 
Department is saying one thing. The 5th Circuit has had a 
ruling. Does it make any difference? Do I get any protection 
from the fact that the 5th Circuit has ruled that it is 
permitted?
    Ms. Roseman. I would assume if you were in the 5th 
District, you would have that protection--
    The Chairman. In the 5th Circuit?
    Ms. Roseman. --from that court's rulings.
    The Chairman. One last question. You said those contests, 
you could bet on those contests which were a combination of 
skill and chance. Would it be legal to bet on elections under 
this?
    [Laughter]
    Ms. Roseman. You know, we posed that question recently to 
the Justice Department because there are predictive markets Web 
sites where you could bet on the outcome of a presidential 
election and a number of other things. Justice considered that 
subject to chance. That was their interpretation.
    The Chairman. So that is illegal?
    Ms. Roseman. That is their interpretation.
    The Chairman. Betting on an election. Thank you.
    Chairman Gutierrez. I believe Dr. Paul has some documents 
to submit.
    Dr. Paul. Right. Mr. Chairman, I ask unanimous consent to 
submit two letters on behalf of Congressman Bachus.
    Chairman Gutierrez. Without objection, it is so ordered.
    The Chairman. Let me just say, because my colleague from 
Florida raised New Hampshire, at this point I am prepared to 
say that the New Hampshire primary is pretty much a game of 
chance.
    [Laughter]
    Chairman Gutierrez. Let me thank the witnesses. I will tell 
both Ms. Abend and Roseman that I have chaired about half a 
dozen of these hearings, and I have never had this kind of 
participation and activity, which says be careful about where 
you go with these regulations. I mean, there is a lot of 
interest. Obviously, there is a lot of interest on the part of 
the members of this committee and the Members of the House of 
Representatives, at least if the participation today is any 
indication, and I think it is an indication.
    So we will work with you as we move forward. I just think 
you have one heck of a complicated job when, you know, you have 
major broadcasters saying the Kentucky Derby, everybody knows 
the gentlemen are betting. And for those of you who--I mean, 
there is so much betting going on in America that this is going 
to be a very difficult challenge for you. I hope you can outlaw 
the foursome in front of me on the golf course on those spots 
stopping those bets, so that I can get through the day a lot 
quicker.
    [Laughter]
    Chairman Gutierrez. Thank you so much. We will--
    The Chairman. And Mr. Chairman, I think there are only 
three votes, so we should be back fairly quickly.
    Chairman Gutierrez. We will adjourn to vote and come right 
back. Thank you so much.
    [Recess]
    The Chairman. [presiding] Thank you. The first panel was a 
lengthy one, but I don't think to the disappointment of any of 
those who are here with us. Chairman Gutierrez has Judiciary 
Committee business, and they are voting, so I will start this 
off.
    We have our second panel of people from the financial 
service industry in particular, and we will begin with Harriet 
May who is the president and chief executive officer of GECU of 
El Paso, and she is speaking on behalf of the Credit Union 
National Association. Please tell our former colleague, Mr. 
Mica, our good friend, not to worry about the proposal to 
abolish the credit unions. We would never do that. So we will 
just ignore that part of the Paulson plan. Don't worry about 
anything. You can go ahead.

 STATEMENT OF HARRIET MAY, PRESIDENT AND CEO, GECU OF EL PASO, 
   TEXAS, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION 
                             (CUNA)

    Ms. May. That is a very nice welcome, Mr. Chairman, and 
thank you for allowing me to testify before this subcommittee. 
The issue of the Unlawful Internet Gambling Enforcement Act of 
2006 is disconterting, and it is my privilege to testify on 
behalf of the Credit Union National Association.
    I am, as you said, Harriet May, president and CEO of GECU 
in El Paso, Texas. I am a member of the CUNA Board of Directors 
and serve as CUNA's board secretary. CUNA is the largest trade 
association for credit unions, representing 90 percent of the 
Nation's 8,400 State and Federal chartered credit unions, which 
in turn serve over 90 million members.
    GECU, formerly known as Government Employees Credit Union, 
has served the families of El Paso since 1932, and we're the 
largest locally owned financial institution in the area, with 
just over $1.4 billion in assets and serving over 277,000 
members.
    When I received the invitation to appear today, I must say 
I relished the opportunity to talk with you about the range of 
serious and practical concerns that CUNA believes will make 
compliance under the Act extremely difficult, if not 
impossible, for financial institutions.
    One of our most fundamental concerns with the 
implementation of this law is that credit unions and other 
financial institutions are in business to provide financial 
services to communities, and we are already burdened with heavy 
policing responsibilities. For example, our compliance duties 
under the Bank Secrecy Act and Office of Foreign Assets Control 
rules are extraordinary. We do not think that the Internet 
gambling law could possibly be implemented without creating a 
list similar to that published by OFAC.
    We are equally concerned that while institutions would be 
required to identify and block transactions that fund illegal 
gambling activities, the proposed rules provide no mechanism to 
verify when a payment transaction is intended for illegal 
Internet gambling.
    H.R. 2046, the Internet Gambling Regulation Enforcement 
Act, introduced by House Financial Services Committee Chairman 
Barney Frank, would require Internet gaming businesses to be 
licensed and pay user fees to the Financial Crimes Enforcement 
Network. The bill could be the vehicle for the Department of 
Justice to take the lead in not only monitoring the entities 
that are complying with registration but also developing a list 
of those businesses or individuals involved in illegal Internet 
gambling activities. Such an approach would promote compliance 
for institutions by providing them a greater level of certainty 
as to whether a transaction for a particular entity should be 
prevented. Exemptions and safe harbor provisions would help 
provide a regulatory framework that might actually work.
    Under the Act, institutions must establish and implement 
policies and procedures to identify and block restricted 
transactions or rely on those established by the payment 
systems. We are concerned that the scope of these requirements 
is not realistic. To illustrate, the proposal calls for 
participants, including card issuers, to monitor certain Web 
sites to detect the unauthorized use of a covered payment 
system, and to monitor and analyze payment patterns. Such 
activities would be time consuming and detract from an 
institution's own business purposes.
    Also, the proposal directs covered entities to address due 
diligence without defining or explaining what is meant by that 
term. In addition, the Act states that institutions that 
reasonably believe a transaction is restricted will not incur 
liability for incorrectly blocking the transaction. We 
appreciate the safe harbor but need clear guidance on what is 
necessary for institutions to show that their belief was 
reasonable. The Federal financial regulators will be 
responsible for enforcing the rule. However, it is not clear 
how this enforcement would occur.
    And lastly, the Act does not include an effective date. 
While we do not believe this proposed regulation should be 
promulgated, if the agencies are required to proceed, 
institutions should have at least 18 months if not longer to 
determine how to meet the new requirements.
    And in summary, Mr. Chairman, CUNA certainly appreciates 
your leadership in reviewing this matter. We don't condone 
illegal Internet gambling or want to see it continue or grow. 
However, the current statute and implementing proposal contain 
several components of great concern. We respectfully urge that 
the proposal not be finalized and that Congress take action to 
address hardships that would otherwise arise.
    Thank you, Mr. Chairman.
    [The prepared statement of Ms. May can be found on page 91 
of the appendix.]
    The Chairman. Ms. May, thank you both for the cogency and 
for being the first witness I have ever seen in 28 years hit 5 
minutes exactly.
    [Laughter]
    The Chairman. May your tribe increase.
    Ms. May. Thank you.
    The Chairman. I thought your testimony was also 
substantively very welcome.
    Next we have a familiar face for us, Wayne Abernathy, who 
is testifying on behalf of the American Bankers Association. 
Mr. Abernathy.

  STATEMENT OF WAYNE A. ABERNATHY, EXECUTIVE VICE PRESIDENT, 
FINANCIAL INSTITUTIONS POLICY AND REGULATORY AFFAIRS, AMERICAN 
                   BANKERS ASSOCIATION (ABA)

    Mr. Abernathy. Thank you, Chairman Frank. We appreciate 
this opportunity to comment on the Unlawful Internet Gambling 
Enforcement Act of 2006 and the proposed rule implementing the 
Act. ABA members have a strong record in the fight against 
financial crime. We have invested enormous resources in 
fulfilling our obligation to report criminal or otherwise 
suspicious activity under the anti-money laundering laws.
    The Unlawful Internet Gambling Enforcement Act takes banks 
beyond the role of reporting potentially or allegedly 
illegitimate financial activity, and makes financial 
institutions the police, prosecutors, and judges in place of 
real law enforcement officers when it comes to the practice of 
unlawful Internet gambling.
    Banks are saddled with this exceptional burden, using the 
words of the Act, ``Because traditional law enforcement 
mechanisms are often inadequate for enforcing gambling 
prohibitions or regulations on the Internet.'' That is to say, 
all the sophistication of the FBI, Secret Service, and other 
police investigation methods is inadequate to apprehend the 
unlawful gambling business or confiscate its revenues.
    ABA believes that punting this obligation to the banking 
industry is an unprecedented delegation of governmental 
responsibility, with no prospect of practical success.
    The modern payment system is constructed to facilitate 
fast, reliable payments at low cost. It is no exaggeration to 
say that nearly all other economic activity in the Nation, in 
one way or another, relies upon the payment system. Hundreds of 
millions of payments are processed each day, about 100 billion 
each year. The burdens placed upon financial institutions by 
the Act would compromise the efficiency of the payment system 
and yet would not curtail Internet gambling.
    At the core of the problem is the lack of a usable 
definition of ``unlawful Internet gambling,'' a definition that 
neither the statute nor the regulations provide. Banks would be 
required to institute policies and procedures to block unlawful 
transactions without being sure which parties or transactions 
to block and when. This is not a reasonable undertaking.
    It is one thing for banks to report suspicious activity 
based upon their judgment of the possibility of illegal 
conduct. It is quite another to require a bank to act on its 
own judgment about legality and impose sanctions for such 
determinations. ABA believes that the flaws in the definition 
of ``unlawful Internet gambling'' are fatal to this effort as a 
legal policy and a practical matter.
    Even if a good definition could be devised, identifying 
commercial customers engaged in unlawful Internet gambling is 
very difficult. All commercial customers would be subjected to 
screens, filters and other processes that might be developed in 
the effort to enforce the law. These screens and other 
processes would almost entirely depend on information obtained 
from the customers. Since neither illegal Internet gambling 
enterprises nor their customers are likely to be up-front about 
their activities, monitoring transactions will fail to catch 
most illegal gambling payments.
    The cross-border provisions of the act and the proposed 
rule further complicate the situation. They require financial 
institutions in the United States to rely on foreign 
correspondent banks to interpret and enforce the Act, a 
responsibility that is not supported by international law.
    In conclusion, there are realistic limits to how the 
payment system can be used effectively to solve the problems 
raised by illegal Internet gambling. The Act and the proposed 
rule do not provide a rational path towards halting unlawful 
Internet gambling. Rather, the path leads to increased cost and 
administrative burden for banks, and erosion in the performance 
of the payment system, without stopping illegal Internet 
gambling transactions.
    Thank you very much, and I'm happy to take any questions.
    [The prepared statement of Mr. Abernathy can be found on 
page 45 of the appendix.]
    The Chairman. Thank you, Mr. Abernathy.
    And next we have, testifying on behalf of the Financial 
Services Roundtable, Mr. Leigh Williams.

  STATEMENT OF LEIGH WILLIAMS, BITS PRESIDENT, THE FINANCIAL 
                      SERVICES ROUNDTABLE

    Mr. Williams. Thank you, Chairman Frank, for the 
opportunity to testify on the proposed rules arising from the 
Unlawful Internet Gambling Enforcement Act, and on H.R. 2046, 
the Internet Gambling Regulation and Enforcement Act, which 
contemplates the creation of a regulatory framework for 
permissible online gambling.
    My name is Leigh Williams, and I am the president of BITS, 
the operations and technology division of The Financial 
Services Roundtable. My members, 100 of the largest U.S. 
financial institutions, have carefully reviewed the proposed 
rules, and I would like to share three impressions from that 
review with you this afternoon. Our full analysis is available 
in a comment letter which we filed with the Federal Reserve and 
the Treasury and which was submitted with my written testimony.
    To provide context, let me say first that as a former chief 
risk officer and as BITS president, I share the concern of the 
subcommittee and the agencies about potential abuse of the 
financial payment system for illegal purposes. My members 
devote substantial resources to knowing their customers and 
identifying suspicious transactions. Fraud prevention has 
become an industry core competency, in fact, and individual 
firms have literally hundreds of people dedicated to anti-money 
laundering programs, OFAC blocking, and suspicious activity 
reporting.
    I am, however, concerned that this policing activity may be 
reaching a point of diminishing returns, where its cost in risk 
management resources and customer disruption may be greater 
than its benefit in enforcement. I have three concerns in 
particular about facets of the proposed rules that elevate the 
compliance burden without commensurate benefit.
    First, the agencies have chosen not to fully define 
``unlawful Internet gambling,'' as we have heard this morning, 
but they presume that institutions could assemble and interpret 
definitions themselves based on pronouncements from the Justice 
Department and others. The very complexity that deterred the 
agencies from issuing a definition will be multiplied a 
thousand fold if thousands of institutions are required to 
establish their own working definitions.
    We urge the subcommittee and the agencies to work toward 
more specificity on the scope of ``unlawful Internet 
gambling.''
    Second, the rules require that institutions block the use 
of the payment system by known unlawful gambling businesses or 
for funding known unlawful gambling transactions, but they do 
not specify whether this knowledge should come from existing 
monitoring activities or if additional policing is expected. 
Requiring institutions to act on knowledge arising from current 
surveillance is a more reasonable expectation than requiring an 
entirely new layer of surveillance.
    We urge the subcommittee and the agencies to moderate the 
operational burden of the rules by leveraging rather than 
supplementing our current policing efforts.
    Finally, my members are concerned about the legal exposure 
associated with both false positives and false negatives. In 
spite of our best efforts, we are likely to block some 
legitimate business, and we may well miss some well-concealed 
illegal activity. If institutions are to be given police 
powers, and in fact policing obligations, some limited form of 
the liability shield granted to public servants should also be 
granted to institutions applying their policies and procedures 
in good faith and in the public interest.
    Before I close, I'd like to comment briefly on H.R. 2046, 
the Internet Gambling Regulation and Enforcement Act. I will 
leave it to the judgment of the Congress whether to allow or 
prohibit online gambling, but I will offer my thoughts on the 
extent to which the bill might moderate my three stated 
concerns about the proposed rules:
    First, creating a distinct category of permissible 
regulated gambling will reduce and may nearly eliminate the 
unlawful Internet gambling that we otherwise may be required to 
define. The scope of prohibited activity will be narrower, and 
with FINCEN's proposed involvement, it should also be clearer.
    Second, the licensing of legitimate operators will simplify 
our institutions' surveillance activities by identifying a 
population of customers that we know are subject to specific 
requirements. However, the question remains of our 
institutions' duty to identify covert gambling operations and 
concealed gambling transactions.
    Finally, by creating a class of regulated gambling entities 
and then requiring that FINCEN actively police them, the bill 
may relieve some of the burden and legal exposure associated 
with our institutions serving in this role.
    While these concerns and others noted in our comment letter 
may not be entirely resolved by H.R. 2046, in my judgment the 
compliance burden to financial institutions would be 
substantially moderated.
    In closing, let me express my confidence that financial 
institutions will do everything that the final rules require of 
them, and many will do more. I urge only that the subcommittee 
and the agencies do everything in their power to be as clear 
and judicious as possible about what is expected.
    Thank you for your time. I would be happy to answer any 
questions.
    [The prepared statement of Mr. Williams can be found on 
page 105 of the appendix.]
    The Chairman. This is a good day. You were also right on 
time. I am very grateful, because you have all put a lot of 
very substantive stuff in here. And finally, we have Mr. Ted 
Teruo Kitada, the senior company counsel of the Legal Group at 
Wells Fargo.

 STATEMENT OF TED TERUO KITADA, SENIOR COMPANY COUNSEL, LEGAL 
                  GROUP, WELLS FARGO & COMPANY

    Mr. Kitada. Thank you, Chairman Frank, for this opportunity 
to testify today regarding the Unlawful Internet Gambling 
Enforcement Act of 2006 and proposed regulations under this 
Act.
    In reviewing the proposed regulations and the Act, Wells 
Fargo has identified certain key issues. We would like to 
briefly highlight two of them for the committee:
    The definition of ``unlawful Internet gambling'' and the 
possible application of the final regulations to existing 
customers.
    First on the definition of unlawful Internet gambling, 
while the term is a core definition under the Act, ``unlawful 
Internet gambling'' is not clearly defined in the regulations. 
This term is defined as placing, receiving, or transmitting a 
bet or wager by means that involves the use of the Internet 
``where such bet or wager is unlawful under any applicable 
Federal or State law.''
    By referencing the State or Federal laws, the banking 
industry is burdened with the responsibility of identifying, 
interpreting, and applying those laws. We handle at Wells Fargo 
a significant number of transactions daily, and just to have 
some sense of the volume, I have set forth the numbers with 
regard to ACH, check, and wire systems transactions.
    For the ACH system, we originate in excess of approximately 
3.1 million debit transactions daily. As a receiving depository 
financial institution, we receive daily approximately 1.2 
million credit transactions. In the check collection system, we 
handle daily about 11 million checks. In the wire transfer 
system, where as a beneficiary's bank, we have responsibility 
to identify restricted transactions, we handle approximately 
25,000 to 30,000 wire transfer transactions daily.
    As an originator's or intermediary's bank, with regard to 
wire transfers directly to foreign banks, we handle about 5,000 
to 6,000 thousand transactions daily.
    As you can see by just the sheer volume of transactions 
that we handle, having the responsibility to identify and block 
restricted transactions would be a significant undertaking for 
us.
    Next on the applicability of the proposed regulations to 
existing customers, we are concerned that when the final 
regulations are issued, those regulations will apply to our 
existing customers. We have presently about 24 million consumer 
customers and about 1.8 million business customers, and we are 
concerned that the final rules will apply to that population.
    Under the USA Patriot Act, we have been complying with the 
due diligence requirements under the regulations issued under 
the Act since October 1, 2003, but there is a significant 
number of customers about which we may know less because those 
customers have not been subject to the robust due diligence 
requirements under the USA Patriot Act.
    There are further requirements under the proposed 
regulations to implement policies and procedures with regard to 
the existing customers. As a merchant customer provider, Wells 
Fargo has approximately 140,000 merchant customer 
relationships. We would be required under the best practices 
advanced under the proposal to adopt amendments to those 
merchant agreements to provide that those merchants were not 
introduce restricted transactions to the card system. We are 
concerned about that requirement.
    As the originator's bank and intermediary bank on foreign 
wire transfers going directly to foreign banks, we are required 
to block and perhaps even close those relationships where we 
have identified restricted transactions.
    We are concerned that in connection with those rights, 
amendments to existing foreign banking relationship agreements 
would be necessary and that we will have to provide for such 
amendments with over 200 correspondent foreign banking 
relationships.
    These observations conclude my remarks, and I will be 
pleased to field any questions the committee may have. Thank 
you.
    [The prepared statement of Mr. Kitada can be found on page 
59 of the appendix.]
    Chairman Gutierrez. I recognize the subcommittee ranking 
member first, so, Dr. Paul, you are recognized for 5 minutes.
    Dr. Paul. Thank you, Mr. Chairman.
    Chairman Gutierrez. Thank you.
    Dr. Paul. I have a couple of brief questions for the panel. 
Anybody who feels like answering them can. They are general, 
and you may have touched on this in your testimony, but I 
wanted you to emphasize it if you have not.
    First, I want to talk about the potential cost that might 
be put on you for doing this. There always has to be a dollar 
cost when we write regulations, nobody really knows about it, 
but I'm sure you have anticipated it. Is there any way you can 
quantify that figure? ``Well, this is going to cost me so 
much.'' I was in the medical field and they would come in with 
regulations and we would have managed care. All of a sudden, 
you might have to hire three new people for your office.
    I'm wondering whether there's a cost, do you have to have 
more people involved and looking after regulations like this 
and the hours that might be involved?
    The other concern I have is the amount of records that we 
keep. There has been financial regulation for a long time, 
since the 1970's when it really got busy and required a lot of 
financial regulations, and even before 9/11, there was a 
tremendous amount of financial regulation sitting out there. 
And it gets to the point where the regulations and the 
information that is accumulated loses its effect because there 
is too much.
    So there is a lot of information on innocent people, and 
then the people who figure, well, we're going to do this 
illegally, maybe they will have a trick, and it really doesn't 
achieve what you are supposed to be achieving. I'm just 
wondering whether you see that as a complication where, yes, 
you can do your best and accumulate a lot of records, but there 
will be so many records that nobody gets to sort these out. In 
spite of all the technology we have here, government sometimes 
tend to be inept and they have too much information, so they 
can't make good use of it.
    And the other point that I want to ask about is, do you 
feel like there's a burden placed on you unfairly where you 
might have to make a judgment and a decision on what is legal 
and what is illegal? Is that burden ever placed on you where it 
seems like that is one of the proper roles of government, 
deciding what is legal and illegal rather than putting the 
burden on the business person or financial institution to 
decide, oh, it's my judgment, you know, to decide what is 
illegal and what we should report?
    Those are the general concerns I have. Does anybody want to 
make any comments on those issues?
    Mr. Abernathy. Yes, if I may, Congressman Paul, can I take 
them in reverse order?
    Dr. Paul. Fine.
    Mr. Abernathy. Because I think that is the way that really 
sets up the questions. The first problem really is, what makes 
this requirement different from, for example, the Bank Secrecy 
Act, Anti-Money Laundering, is that under this piece of 
legislation and the regulations that will back it up, we're 
required not only to identify whatever might be unlawful, but 
we're actually required to impose a sentence. We're told to 
deny financial services to someone whom we determine is engaged 
in unlawful activity, unlawful Internet gambling.
    So the first problem is, this goes beyond reporting, which 
is what we do under BSA. Under the Bank Secrecy Act, Anti-Money 
Laundering, we see something that we think is improper, and we 
report that. And the law enforcement folks then take their 
responsibility and they do what they feel is appropriate to do 
with that. We are now told, look at it. If you determine it's 
wrong, you impose the sentence. And we think that's a step too 
far in devolving governmental responsibility.
    That leads to the second point, which I think requires a 
comparability in terms of cost. It's very difficult really to 
put a cost on something that isn't in place yet, and 
particularly if it's something that could go in any number of 
different ways in terms of how the enforcement burden is 
defined. But I would give as an analogy the costs that are 
imposed under the Bank Secrecy Act, even though taking into 
account how that's different from what I said.
    A typical $100 million bank, a bank with $100 million in 
assets--that is about the size of the average ABA member, 
although we have banks of all sizes in our membership--tells us 
that they have two to three employees who do nothing but 
compliance efforts with Bank Secrecy Act/Anti-Money Laundering. 
They don't do anything to serve a customer. They don't provide 
loans. They don't provide any service other than meeting the 
paperwork burden. And as you correctly point out, nearly all of 
that burden is gathering data on law-abiding people conducting 
legal transactions. That is how this could eventually evolve.
    And then the last point that I would make, what defies 
really predicting the cost of all of this is we don't know what 
is unlawful, what is illegal, and as long as that burden is 
upon us, estimate it is going to be pretty close to impossible.
    Dr. Paul. Thank you. Any--
    Mr. Williams. Mr. Paul, if I might offer a couple of 
comments regarding cost. One is that I would echo what Mr. 
Abernathy has said about the regulatory uncertainty ironically 
making it very difficult for us to estimate what the ultimate 
cost of compliance might be.
    Chairman Gutierrez. The gentleman's time has expired. 
Chairman Frank is recognized for 5 minutes.
    The Chairman. Mr. Kitada, I'm told in your comment letter 
and elsewhere you have also noted that we can't be sure what 
entities are covered, that ``financial institution,'' as the 
statute defines it, may sweep more widely than people would 
ordinarily think. Could you comment on that?
    Mr. Kitada. With regard to the definition of financial 
institutions--
    The Chairman. The transmitters of money.
    Mr. Kitada. Oh, money transmitters? Yes. Under the Act, 
there's a reference to the definition of money transmitters, 
and in contrast, there's also under the regulations issued by 
the Treasury under a definition for money service business, and 
with regard to the money service business, there is a exclusion 
or safe harbor for check cashers that cash items regularly for 
under $1,000. And there's no such exclusion under the Act. And 
so consequently, with regard to money transmitters, that 
population of check cashers who heretofore may have enjoyed a 
safe harbor under the Bank Secrecy Act, will now become subject 
to this Act and to the requirements for developing policies and 
procedures. And it also raises some challenging questions for 
the industry in terms of policing the behavior of money 
transmitters.
    The Chairman. Well, that is very important. That is what I 
wanted to get to. And, again, I want to stress, we can divide 
this. Congress of course has the right, I believe, to ban 
gambling. I don't agree with it. I share the views of my 
colleague from Texas and others that it ought to be a matter of 
personal liberty.
    But there is a second question, if we decide to do it, as 
to how to do it. And in effect, what this does, this law, is to 
draft the financial service industry, in effect deputize the 
financial service industry and turn them into the enforcers of 
the law. It seems to me we can go at this at the two levels.
    But here is part of the problem. You have due diligence 
requirements, etc. You have all these customers. What troubles 
me is, and there is a letter from Grover Norquist on behalf of 
a coalition of organizations raising questions about privacy. 
What I am afraid of is that there is a conflict between the 
obligation imposed on you by the Act to do due diligence and to 
see whether or not people are trying to get around this, and 
the privacy expectations of your customers.
    Mr. Abernathy, is that an accurate description of the 
dilemma?
    Mr. Abernathy. I think that's very accurate. A bank is 
really in the position of having to make one decision: cut off 
all transactions that look in any way like they might be 
heading toward illegal Internet gambling, or become very 
intrusive in the kinds of questions we ask, so that we can make 
the decision the Act forces us to make.
    The Chairman. And one of the things it will do, as I said, 
is to draft you to be the law enforcement people. We have seen 
this in other cases. What you can envision is a tremendous 
increase in complaints about the financial institutions to the 
consumer protection agencies because the Federal Government has 
made you do it.
    And a lot of customers who are going to find themselves 
having their transactions cut off or blocked aren't going to 
realize that this is something imposed on you by the Federal 
Government. I think the recipe for problems here is just 
enormous, because you are being put in this position where you 
have to do this.
    Let me go back to the horse racing question. If I am a 
bank, do I have to block someone who has made a bet on a horse 
race in a State where horse racing: (a) was legal; (b) wasn't 
legal; (c) wasn't legal, but it is in the 5th Circuit; or (d) 
all of the above?
    Mr. Abernathy. I think one of the problems is, even though 
you might know where the race took place, you don't know where 
the bet is coming from, if you're talking about the Internet.
    The Chairman. And that's the determinant, not where the 
race took place--so in other words--okay.
    Mr. Abernathy. You have two or more places you have to be 
worried about--where did the transaction take place, where did 
the event take place, where did the person who was doing the 
activity, where were they when--
    The Chairman. I don't have to meet both. And of course, it 
would never--well, presumably it would never be legal to bet on 
the--or we don't know that. I mean, what do you advise your 
client then?
    Mr. Abernathy. We would advise them--I mean, we frankly, as 
a trade association, can't give them specific advice, but what 
I suspect they would do is they would just block the 
transaction, and that gets back to Mr. Paul's point. We would 
block a lot more legal transactions in the effort to avoid 
being tagged for failure to block the illegal one.
    The Chairman. One of the issues that has been occupying us 
is the competitive aspect. We have been told that we have to be 
careful, whether it is Section 404 of Sarbanes-Oxley or other 
things, about driving financial business out of America. If we 
were to adopt tomorrow as the major league sports--as the major 
sports league want, if we were promptly to adopt the pending 
regulations, would that have any effect on the competitive 
position of American financial institutions in the world?
    Mr. Abernathy. I think the biggest impact would be that it 
begins to--well, more than begins--it continues to compromise 
the quality of the payment system. It's not just the banks 
themselves, but you're now putting a new burden on what is one 
of the fundamental purposes of the banking system, and that is 
to make sure payments can be made between parties as quickly, 
as efficiently, and at as low a cost as possible. We have now 
compromised that.
    The Chairman. Any others?
    Mr. Williams. I think there are three ways, Mr. Chairman, 
that we might undermine competitiveness. One is we might be 
required to increase compliance costs to the point where they 
would become a threat. We might disrupt customer service, 
particularly in this overblocking to the point where that would 
become a real issue, or we might divert resources from other 
more critical risk management activities. And that also could 
put the industry and customers at risk.
    The Chairman. I am going to close by saying, as the 
chairman of this committee, that we have some responsibility to 
try and facilitate the functioning of the financial system. You 
know, just as you are being drafted by the bill, I think our 
committee was drafted, although by its own leadership, to do 
this. If our colleagues want to go on an anti-gambling crusade, 
well, I can't stop them necessarily, but I would hope we could 
stop them from burdening this committee and our jurisdiction, 
the financial services institutions, from getting entangled in 
it.
    Thank you, Mr. Chairman.
    Chairman Gutierrez. Are there any further questions from 
members of the subcommittee?
    [No response]
    Chairman Gutierrez. I want to thank the panel for having 
come together, because I think we have had a rather rich 
discussion where Dr. Paul and Chairman Frank really don't want 
us involved in the regulatory matters at all in terms of 
legislating the morality of gambling and betting.
    I might be convinced that there might be some use to doing 
that here in Congress, but what I'm not convinced is that 
financial institutions should be the sheriff, should be the 
people making the decisions. Because I think that you have a 
relationship with the public in general which is much more 
important than this one, and I just don't know how we do it.
    And so we're going to be very careful with Treasury and the 
Federal Reserve Board as they come up with the regulations, 
because if you have never gotten your credit card statement and 
made a call to your credit card company about a particular 
billing amount because you didn't recognize the store, you 
didn't recognize the amount, maybe you're not being as careful 
as I and others are when they get their credit card statements, 
because I have certainly on many occasions had to call my 
credit card company so they could explain to me the company and 
the nature, because there are so many companies that when you 
charge something, have a totally different name when it comes 
up on your credit card. Now when they tell you the address and 
what they do, you're okay, I remember, I did that. That was a 
charge.
    So we all do that day in and day out, checking our credit 
card statement. I would hate to think about what banks and 
other financial institutions and credit card companies would 
have to do in order to do that. And I'm no great friend of the 
credit card institutions and financial institutions and feeling 
sorry about their processing of forms, because many times when 
I call, I find out that $2 overdraft on that Starbucks coffee 
which they said we just couldn't avoid is all of a sudden $120.
    And I know all of you know that happens every day in 
America. You get a debit card, give it to your kid, you figure 
they can't use--now, interesting, they can't get the $2 in 
cash, but they can get the overdraft of $2 on that Starbucks 
coffee on that day. And it will take them a week, and it's $10 
a day and it's $20.
    So, I'm not here as a standard bearer for the credit card 
companies and the kinds--but I would think having an honest 
discussion about those overdraft statements and how much 
companies can charge is a much better function of the Financial 
Services Committee and regulating our economy and our 
relationship between your institutions and the public in 
general than doing the gambling thing. And how we do 
remittances and payday lending, and the extraordinary amounts 
of interest to the American public. I just think that those are 
much more important issues that I would like to engage all of 
you in.
    I appreciate your comments. I thank you for the comments 
that you made during the open period. I will tell you that I 
take them very, very seriously, as I know all of the members of 
this committee so, and without any further questions, I thank 
the members of this panel. I thank the previous panel, and I 
thank all of those who have come to participate in this hearing 
on gambling.
    Thank you so much.
    [Whereupon, at 12:52 p.m., the hearing was adjourned.]


                            A P P E N D I X



                             April 2, 2008


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