[House Hearing, 110 Congress] [From the U.S. Government Printing Office] PROPOSED UIGEA REGULATIONS: BURDEN WITHOUT BENEFIT? ======================================================================= 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 U.S. GOVERNMENT PRINTING OFFICE 42-714 PDF WASHINGTON DC: 2008 --------------------------------------------------------------------- For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092104 Mail: Stop IDCC, Washington, DC 20402�090001 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 PROPOSED UIGEA REGULATIONS: BURDEN WITHOUT BENEFIT? ---------- 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. 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