    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                     H.R. 2266, THE REASONABLE PRUDENCE IN
                       REGULATION ACT; AND H.R. 2267, THE
                     INTERNET GAMBLING REGULATION, CONSUMER
                        PROTECTION, AND ENFORCEMENT ACT

    =======================================================================

                                    HEARING

                                   BEFORE THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                DECEMBER 3, 2009

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-92

                                   ----------
                             U.S. GOVERNMENT PRINTING OFFICE

    56-235 PDF                       WASHINGTON : 2010

    For sale by the Superintendent of Documents, U.S. Government Printing
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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                     BARNEY FRANK, Massachusetts, Chairman

    PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
    MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
    CAROLYN B. MALONEY, New York         PETER T. KING, New York
    LUIS V. GUTIERREZ, Illinois          EDWARD R. ROYCE, California
    NYDIA M. VELAZQUEZ, New York         FRANK D. LUCAS, Oklahoma
    MELVIN L. WATT, North Carolina       RON PAUL, Texas
    GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
    BRAD SHERMAN, California             WALTER B. JONES, Jr., North
    GREGORY W. MEEKS, New York               Carolina
    DENNIS MOORE, Kansas                 JUDY BIGGERT, Illinois
    MICHAEL E. CAPUANO, Massachusetts    GARY G. MILLER, California
    RUBEN HINOJOSA, Texas                SHELLEY MOORE CAPITO, West
    WM. LACY CLAY, Missouri                  Virginia
    CAROLYN McCARTHY, New York           JEB HENSARLING, Texas
    JOE BACA, California                 SCOTT GARRETT, New Jersey
    STEPHEN F. LYNCH, Massachusetts      J. GRESHAM BARRETT, South Carolina
    BRAD MILLER, North Carolina          JIM GERLACH, Pennsylvania
    DAVID SCOTT, Georgia                 RANDY NEUGEBAUER, Texas
    AL GREEN, Texas                      TOM PRICE, Georgia
    EMANUEL CLEAVER, Missouri            PATRICK T. McHENRY, North Carolina
    MELISSA L. BEAN, Illinois            JOHN CAMPBELL, California
    GWEN MOORE, Wisconsin                ADAM PUTNAM, Florida
    PAUL W. HODES, New Hampshire         MICHELE BACHMANN, Minnesota
    KEITH ELLISON, Minnesota             KENNY MARCHANT, Texas
    RON KLEIN, Florida                   THADDEUS G. McCOTTER, Michigan
    CHARLES A. WILSON, Ohio              KEVIN McCARTHY, California
    ED PERLMUTTER, Colorado              BILL POSEY, Florida
    JOE DONNELLY, Indiana                LYNN JENKINS, Kansas
    BILL FOSTER, Illinois                CHRISTOPHER LEE, New York
    ANDRE CARSON, Indiana                ERIK PAULSEN, Minnesota
    JACKIE SPEIER, California            LEONARD LANCE, New Jersey
    TRAVIS CHILDERS, Mississippi
    WALT MINNICK, Idaho
    JOHN ADLER, New Jersey
    MARY JO KILROY, Ohio
    STEVE DRIEHAUS, Ohio
    SUZANNE KOSMAS, Florida
    ALAN GRAYSON, Florida
    JIM HIMES, Connecticut
    GARY PETERS, Michigan
    DAN MAFFEI, New York

            Jeanne M. Roslanowick, Staff Director and Chief Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        December 3, 2009.............................................     1
    Appendix:
        December 3, 2009.............................................    29

                                   WITNESSES
                           Thursday, December 3, 2009

    Aftab, Parry, Executive Director, WiredSafety....................    10
    Brodsky, Michael, Executive Chairman, Youbet.com.................    18
    Dowling, James F., President and Managing Director, Dowling
      Advisory Group.................................................    16
    Martin, Hon. Robert, Tribal Chairman, Morongo Band of Mission
      Indians........................................................     9
    Sparrow, Malcolm K., Professor, John F. Kennedy School of
      Government, Harvard University.................................    12
    Vallandingham, Samuel A., Chief Information Officer and Vice
      President, The First State Bank, on behalf of the Independent
      Community Bankers of America (ICBA)............................     7
    Whyte, Keith S., Executive Director, National Council on Problem
      Gambling (NCPG)................................................    14

                                    APPENDIX

    Prepared statements:
        King, Hon. Peter.............................................    30
        McDermott, Hon. Jim..........................................    32
        Aftab, Parry.................................................    35
        Brodsky, Michael.............................................    39
        Dowling, James F.............................................    44
        Martin, Hon. Robert..........................................    49
        Sparrow, Malcolm K...........................................    53
        Vallandingham, Samuel A......................................   156
        Whyte, Keith S...............................................   163

                  Additional Material Submitted for the Record

    Bachus, Hon. Spencer:
        Written responses to questions submitted to Samuel A.
          Vallandingham..............................................   166
        Letter from the FBI, dated November 13, 2009.................   168
        Letter from Concerned Women for America (CWA)................   171
        Letter from various sports leagues...........................   172
        Letter from Professor John Warren Kindt, with attachments....   174
        Letter from the Coalition Against Gambling in New York.......   186
        Letter from CasinoFree PA....................................   188
        Letter from Stop Predatory Gambling..........................   190
        Letter from Focus on the Family..............................   192
        Letter from Citizens Against Casino Gambling in Erie County..   193
    Himes, Hon. Jim:
        ``Internet Gambling, Issues & Solutions''....................   195
        Map of 2,048 Global Internet Casino Sites....................   209
    Miscellaneous Members:
        Written statement of the Alderney Gambling Control Commission
          Channel Islands............................................   212
        Written statement of Marie Alexander, President and CEO,
          Quova......................................................   228
        Written statement of Jay Cohen, President, Antiguan Online
          Gaming Association.........................................   233
        Written statement of Rt Hon David Blunkett MP, Former Home
          Secretary and Cabinet Member in the United Kingdom.........   239
        Written statement of Catania Ehrlich & Suarez, P.C. Law
          Offices....................................................   248
        Written statement of the Credit Union National Association
          (CUNA).....................................................   250
        Written statement of the European Sports Security Association
          (ESSA).....................................................   251
        Written statement of Mary Williams, Chief Secretary, Isle of
          Man Government.............................................   253
        Written statement of Francesco Rodano, Head of Remote Gaming,
          AAMS-Autonomous Administration of State Monopolies (Italy's
          Gaming Regulatory Body)....................................   257
        Written statement of Keith Marsden, Managing Director,
          192business.com............................................   262
        Written statement of the National Association of Federal
          Credit Unions (NAFCU)......................................   280
        Written statement of Craig Pouncey, Partner, Herbert Smith
          LLP (Brussels).............................................   290
        Written statement of Chris Thom, Chairman, Secure Trading
          Inc........................................................   293

                       H.R. 2266, THE REASONABLE PRUDENCE
                       IN REGULATION ACT; AND H.R. 2267,
                       THE INTERNET GAMBLING REGULATION,
                    CONSUMER PROTECTION, AND ENFORCEMENT ACT

                                  ----------

                           Thursday, December 3, 2009

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 10:04 a.m., in
    room 2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Members present: Representatives Frank, Maloney, Sherman,
    Moore of Kansas, Baca, Green, Cleaver, Perlmutter, Carson,
    Adler, Kosmas, Himes, Peters, Maffei; Bachus, King, Biggert,
    Capito, Campbell, Posey, Jenkins, and Lee.
        The Chairman. The hearing will come to order.
        I will recognize myself for 5 minutes to say that it is
    nice to be able to think legislatively about things other than
    the financial crisis which has consumed this committee to a
    great extent since September of last year, 2008. The question
    is raised sometimes why this committee is the committee that is
    dealing with the questions of gambling. Under a previous
    chairman, Mr. Leach, the committee initiated legislation to
    deal with the Internet gambling issue by controlling the
    payment method, and so that is why it continues to be in our
    jurisdiction. There are other committees that have jurisdiction
    over other aspects of this, such as the Wire Act, which does
    not come before us.
        I continue to believe that it is a great mistake for the
    Congress of the United States to tell adults what to do with
    their own money on a voluntary basis. Some adults will spend
    their money unwisely. It is not the business of the Federal
    Government to prevent them legally from doing it. They should
    be given information, and they should be given consumer
    protections. In cases where an accumulation of bad individual
    decisions have a systemic impact, and arguably there was an
    element to that in the subprime crisis, then we have to step
    in. But I think John Stuart Mill got it right in the 19th
    Century, when people are making decisions to take actions that
    primarily affect them, they ought to be allowed to do that.
        I am struck by, frankly, what seems to me an inconsistency
    on the part of some of my conservative colleagues who bemoan
    the ``nanny state,'' who talk about limited government, who
    urge that the government ought to stay out of people's lives,
    and who also argue that the Internet ought to be free of
    restrictions, but who then single out the Internet for
    restrictions on personal choices to be made by individuals. We
    have been told that this is just a screen for, or could be a
    screen for, terrorists and other activities.
        I am encouraged by the strong support for the legislation
    repealing this and setting up a regulatory regime instead that
    comes from the ranking Republican and former chairman of the
    Homeland Security Committee, the gentleman from New York, Mr.
    King. No Member of this House exceeds him in his concern for
    public policies that protect us against terrorism. His advocacy
    for this, I think, is very important.
        I am also glad to have the strong support here of the
    gentleman from Texas, Dr. Paul, who is acting consistently on
    his opposition to government intrusion, unlike others who
    appear to pick and choose.
        It is true that if things are on the Internet, there is the
    possibility that underaged people can get at them. There are a
    whole range of things on the Internet which we would not like
    underaged people to avail themselves of: the sale of alcoholic
    beverages, sex-oriented material, purchases. People who are
    underage shouldn't be allowed to freely buy things in the name
    of the family.
        The notion that because some people will abuse something,
    you prevent everybody from doing it, is as great a threat to
    the liberty of the individual as any philosophy I have ever
    seen. And it also, of course, stops nothing. There are people
    who gamble to excess, there are people who drink to excess,
    there are people who smoke to excess, there are young people
    who play video games to excess, there are people who diet to
    excess; they do all manner of things to excess. And again, in a
    free society individuals are given information and allowed to
    make their choices and not prohibited from doing it.
        I do remember an argument that was made on the Floor of the
    House by the lead sponsor of the bill, originally the gentleman
    from Iowa, when he said, this Internet gambling adds nothing to
    the GDP, so we can ban it. Well, whether it does or doesn't is
    arguable, but I have to say the notion that if something does
    not add to the GDP, we have a right to ban it, is chilling and
    it has negative implications for personal freedom.
        There are large numbers of people in this country who enjoy
    gambling on the Internet. I believe we should do what we can to
    regulate this as you regulate other activities. But the notion
    that this Congress should tell millions of adult Americans that
    we know better than they what they should do with their own
    money on their own time on their own computers seems to me to
    be a very grave error, and I hope that this whole legislation
    is repealed.
        The Chairman. The gentleman from Alabama is now recognized
    for how much time?
        Mr. Bachus. For 10 minutes.
        I thank the chairman. I think, as all of us know, Chairman
    Frank and I have very different views on this, and we approach
    this very differently. He wants to legalize Internet gambling,
    and then he wants to tax it. On the other hand, I believe that
    Internet gambling is and has been and will continue to be a
    substantial threat to our youth, and that any economic benefit
    from taxing Internet gambling would be more than offset by the
    harm it causes our young people.
        And we have had hearing after hearing where experts
    testified as to really what we have as a wave of young
    Americans who are addicted to gambling and the problems that
    causes, which are in many cases heartbreaking. I saw an article
    in The New York Times where one mother wrote a letter to the
    editor describing the horror that had been created from her son
    whom she basically has lost to Internet gambling.
        Internet gambling characteristics are unique. Online
    players can gamble 24-hours-a-day, 7-days-a-week from home.
    Children may play without sufficient age verification, and they
    can bet with a credit card. We have had testimony before that
    this undercuts a player, particularly a young person's
    perception of the value of cash; that the younger you become
    engaged in this behavior, the more addictive it is. It actually
    wires the brains of some of our young people. It leads to
    addiction, bankruptcy, and crime. We have actually had
    testimony that one of the most outstanding young football
    players from a Florida university, his whole career was ruined,
    and that career started with Internet gambling at a young age.
    He, in fact, was arrested for burglarizing a business to pay
    for gambling debts.
        Young people are particularly at risk because if you put a
    computer in a bedroom or a dorm room of a young person, it is a
    temptation that many fall prey to. It is simply asking too much
    of young people that they resist this temptation.
        The chairman talks about America and what it stands for,
    and one of the things it stands for is not telling adults what
    they can and cannot do. But one thing that America also stands
    for, and I think every society, whether it is American society
    or any other society, I think one of our number one goals ought
    to be protecting our youth. We certainly do not allow people to
    come into their bedroom and serve them liquor at a young age or
    sell them pornography. And the fact that the chairman says,
    well, you know, you can buy pornography on the Internet, you
    can order liquor on the Internet, you ought to be able to allow
    Internet gambling, I think makes no sense whatsoever.
        For more than a decade, the majority of this Congress has
    worked for and voted for legislation to combat illegal Internet
    gambling. It has always been illegal in the United States, but
    no one could enforce the law because these criminal enterprises
    operated offshore. They operated offshore because that removed
    them from the long arm of not only the Justice Department, but
    also other law enforcement agencies.
        We have had letters from the great majority of attorneys
    general telling us that without some legislation such as the
    legislation that we passed in 2006, they were powerless to stop
    Internet gambling, which was against the law of all their
    States. And I will remind anyone who is interested in this
    subject that it is the States and the people of the States,
    adults in those States, who have gone to the polls or their
    legislative representatives have passed laws saying that
    illegal Internet gambling should be stopped. The States
    prohibit it, and the last time I looked, all of them did it
    through a democratic process.
        In a nation of law, it only makes sense to try to put these
    illegal Internet criminal enterprises out of business and not
    reward them as the chairman would do. Congress took a major
    step towards protecting our youth and stopping this illegal
    activity with the passage of the 2006 Unlawful Internet
    Gambling Enforcement Act. It is that Act that the chairman
    continues to try to repeal or postpone enactment of, and
    obviously he has allies at the Treasury Department and the
    Federal Reserve who last week announced that they were again
    delaying implementation of the law another 6 months. These
    regulations should have been finalized and implemented more
    than 2 years ago. This Congress voted; the House voted by an
    overwhelming number, over 330 Members, as I recall, over three-
    fourths of the Congress, to stop illegal Internet gambling.
    And, Mr. Chairman, I think it is time for you, the Treasury,
    and the Fed to stop delaying the will of the great majority of
    this Congress and the American people. Quit the foot dragging
    and enforce this law.
        The Fed is not here today. The chairman didn't ask the Fed
    or the Justice Department to come in and defend themselves
    because they really have no defense. It is they who ought to be
    testifying today and not most of the witnesses, many of whose
    studies are funded by the gambling industry or their
    associations are supported by the gambling industry.
        The absence of the Justice Department and the Federal
    Reserve is particularly egregious in light of a letter I
    received from the FBI earlier this month. Without objection, I
    would like to submit that letter for the record now.
        The Chairman. Without objection, it is so ordered.
        Mr. Bachus. In the letter, the FBI warns that technology
    exists to facilitate undetectable manipulation of online poker
    games. The FBI warns that technology can be used in peer-to-
    peer games to illegally transfer ill-gotten gains from one
    person to another. The FBI, in their letter, rejects claims
    from vendors who say they can validate age and location.
        The witnesses today are going to again testify that
    technology is available to keep minors from gambling on the
    Internet. The FBI's letter rejects that contention. So the law
    enforcement agency, the Federal law enforcement agency,
    actually says that these so-called protections won't work.
        Before the UIGEA, offshore Internet casinos were
    proliferating, raking in more than $6 billion annually from
    Americans, $6 billion. We found out through disclosures that
    about $40 million of that has been spent right here in
    Washington, D.C., hiring lobbyists. One of the first lobbyists
    they hired was Jack Abramoff. If Congress repeals the law, we
    will continue to have these online casinos.
        In the next 5 years, Chairman Frank, I feel that if you are
    successful in creating a Federal right to gamble on the
    Internet, we will create a generation of tens of millions of
    Americans who from their youth will be addicted to Internet
    gambling and, therefore, lifelong problem gamblers. That is a
    problem for all of us. Gamblers will be able to place bets from
    their home computers, but also from their BlackBerries as they
    drive home from work, or their iPhones as they wait in line at
    the grocery store. One company has already developed an iPhone
    gambling software and plans to release it whenever the law is
    reversed. They have announced that. I will do everything I can
    to make sure this never happens.
        In conclusion, Mr. Chairman, supporters of the legalization
    of Internet gambling argue that prohibition has sent Internet
    gambling underground and left the vulnerable unprotected, but
    that was the case before our law. The vulnerable were
    unprotected because companies that tap the American market
    violated our laws and our protections. No amount of regulation
    can begin to protect against this particularly predatory and
    abusive intrusion into American homes and the harm it is
    causing our youth. No approach to blocking Internet gambling
    will ever be perfect, but what we have fashioned is our best
    hope.
        I yield back the balance of my time.
        The Chairman. I yield myself my remaining 5 minutes.
        First, when we announced this hearing, a member of the
    Minority staff said that if we had a hearing, they would ask us
    for official representatives, but I received no such request.
    If the gentleman has a record of a request to me--he often
    writes me letters and asks for hearings. We had one yesterday
    at his request, but I don't recall a request to me for this
    one.
        Mr. Bachus. I supplied that request. Our staff repeatedly,
    over the last week or two, has asked that you call the members
    of the committee here. And I will introduce that for the
    record.
        The Chairman. I was surprised. In writing?
        Mr. Bachus. Yes.
        The Chairman. We are talking about oral staff-to-staff.
        Mr. Bachus. Not only that, but e-mail correspondence.
        The Chairman. We got e-mail correspondence asking as of
    what date?
        Mr. Bachus. I will get that to you.
        The Chairman. I haven't seen it. But I will say this: The
    gentleman from Alabama, when he was concerned about a hearing,
    asked about one or asked about witnesses, he has never brought
    this up to me.
        Mr. Bachus. Well--
        The Chairman. I am sorry, my time. Those are the rules.
        The gentleman said he asked this. We had a hearing
    yesterday at his request, as he noted. We frequently have
    hearings at the request of the Minority. We have a hearing on
    covered bonds coming up. I sit next to the gentleman. He is
    very vocal when he has things that he cares about, and he never
    referred that to me.
        Secondly, I do want to say with regard to the delay, the
    gentleman said they have been dragging their feet for over 2
    years. Let us be clear that the great bulk of that 2 years was
    under the Bush Administration. After all, it was the Bush
    Administration that was there for most of the time. They did--
    and here is one of the reasons why I think they should have
    been suspended--issue a midnight regulation. President Bush had
    said towards the end of his term that he wasn't going to issue
    last-minute regulations, and this one was issued at the very
    last minute just before he went out of office, not a practice
    that ought to be condoned.
        It is also the case that there are two arguments here: one
    is about the law; and the other is about the extraordinary
    burden it imposes on the banking industry. It co-opts them to
    be the antigambling cops. The fact is that overwhelmingly,
    people in the financial industry have said that putting the
    burden on them to decide what is or isn't a payment for
    gambling is a great burden on them at a bad time. And in fact,
    when the testimony came, particularly from the Federal Reserve,
    the Federal Reserve made it very clear that they didn't think
    much of this law, they didn't think--not from the standpoint of
    the morality of gambling or not, but from the standpoint of
    whether or not it was possible in a reasonable way to enforce
    it. And that is a very big issue here with the problems banks
    now have, and this is for all banks, big banks, little banks.
    With the problems they now have, imposing this duty on them
    seems to me very odd.
        I also want to say that I was astounded by the gentleman's
    prediction that millions of young Americans will become
    gambling addicts if they can gamble. I have heard hyperbole in
    my years here. The notion that millions of young Americans will
    become addicts is based on absolutely no factual evidence
    whatsoever. There are addicts to gambling, there are addicts to
    video games, there are addicts to cigarettes, and there are
    addicts to a lot of things that shouldn't be there.
        And the gentleman said, well, it is in the bedroom the
    liquor has to be delivered. But pornography doesn't have to be
    delivered. Pornography can be accessed directly on the Web.
    There are things you can access directly on the Web that we
    don't think young people should see.
        And I have to be clear and say I don't think this is simply
    about protecting young people. That may be the main motivation
    from the gentleman from Alabama. We have a lot of people in
    this country who think gambling is wrong and want to prevent
    adults from doing it, and that is not something to which we
    should be giving approval.
        And we come back to this general view. Yes, there was a
    football player who became addicted, a woman's son became
    addicted, there are addictions of various sorts. The notion
    that you end the legal ability of adults to spend their own
    money on an activity that harms no one at all because some
    minority of people will abuse it is a recipe for the
    destruction of individual freedom, and that is what we are
    talking about. And it is especially done in a way that imposes
    great regulatory burdens. Of all the regulatory burdens we have
    talked about imposing on the financial industry, this one
    appears to be the greatest.
        So I simply want to reiterate we are talking here about
    personal freedom. And, again, the principle we are adopting--
    and, by the way, it is also the principle of Internet freedom.
    This would then mean it was easier to do things offline than
    online.
        You also have the argument, by the way, the poker players.
    I think to suggest that the millions of Americans who play
    poker and play poker on the Internet, that they are addicts or
    about to be addicts or people who are fostering addiction is
    both inaccurate and terribly unfair. So I hope we will go
    forward with this legislation.
        And now let me call on the gentlewoman from West Virginia,
    who wanted to introduce one of the witnesses.
        Mrs. Capito. Thank you, Mr. Chairman. I would like to
    introduce one of the witnesses, Sam Vallandingham, to the
    committee this morning. He is currently the vice president and
    chief information officer of First State Bank in Barboursville,
    West Virginia, and he is testifying today on behalf of the
    Independent Community Bankers of America. Sam and his family,
    their bank, has had a presence in West Virginia for over 100
    years, and I have had the fortunate opportunity to work with
    Sam over my 9 years in Congress. He is a tireless advocate for
    community banking in West Virginia and in his local community
    of Barboursville, and he is a great West Virginian.
        Welcome, Sam.

    STATEMENT OF SAMUEL A. VALLANDINGHAM, CHIEF INFORMATION OFFICER
      AND VICE PRESIDENT, THE FIRST STATE BANK, ON BEHALF OF THE
            INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA)

        Mr. Vallandingham. Thank you, Mrs. Capito.
        Chairman Frank, Ranking Member Bachus, and members of the
    committee, my name is Sam Vallandingham. I am vice president
    and chief information officer of the 104-year-old First State
    Bank in Barboursville, West Virginia. I am also vice chairman
    of the payments and technology committee for the Independent
    Community Bankers of America. Barboursville is an historic town
    of 3,200 people in the far western part of the State near the
    Kentucky border. Our bank employs 58 people at 3 locations and
    holds close to $214 million in assets.
        Banking has been in my family for four generations. My
    great-grandfather, a Kentucky tobacco farmer, sold his farm to
    raise capital to start First State Bank. It was said my
    grandfather came to West Virginia in a horse and buggy, and
    those two were eventually sold with the proceeds used to set up
    the bank. The original charter, dated September 1, 1905, and
    the certificate of authority still hang on the wall in the
    bank's main office.
        I am pleased to represent community bankers and ICBA's
    5,000 members at this important hearing on H.R. 2266, the
    Reasonable Prudence in Regulation Act, and H.R. 2267, the
    Internet Gambling Regulation, Consumer Protection, and
    Enforcement Act. ICBA commends Chairman Frank for introducing
    this legislation, which would provide greater certainty for all
    concerned.
        Throughout these deliberations, ICBA has not taken a
    position on the appropriateness of prohibiting Internet
    gambling. We did, however, express our concerns over the
    burdens that the community banking industry and payment system
    would face if charged with identifying and blocking unlawful
    Internet gambling payment transactions. Payment systems were
    not designed for this function, and such requirements would
    undermine payment system efficiencies.
        The added burden of monitoring all payment transactions for
    the taint of unlawful Internet gambling would drain finite
    resources currently engaged in complying with antiterrorism,
    anti-money laundering regulations, the plethora of new
    regulations emerging from the financial crisis, and the daily
    operation of community banks to meet the financial needs of
    their customers and communities. Therefore, we greatly
    appreciate your decision to include the ICBA-supported
    provisions granting Treasury and the Federal Reserve authority
    to exempt certain transactions when transaction tracking and
    blocking is not reasonably practical.
        But the law still requires banks to avoid doing business
    with unlawful Internet gambling companies. Unfortunately, the
    law fails to define unlawful Internet gambling, which is
    vitally necessary if banks are to comply with the law. As a
    result, the burden of identifying which entities are engaged in
    unlawful Internet gambling rests solely on financial
    institutions. Community banks are required to determine whether
    current or prospective customers are in violation of diverse
    Federal, State, and Indian tribal gaming laws.
        Obviously this is not workable. Therefore, ICBA strongly
    endorses H.R. 2267, the Internet Gambling Regulation, Consumer
    Protection, and Enforcement Act, which establishes a Federal
    regulatory and enforcement framework for licensing Internet
    gambling operators. The certainty provided by this approach is
    key to our support. ICBA strongly urges the committee and
    Congress to expeditiously pass H.R. 2267.
        Mr. Chairman, ICBA greatly appreciates your efforts to
    enact this legislation. While you and your colleagues must
    decide on the Nation's policy for Internet gambling, we hope
    you can all agree that the Nation's community banks, as well as
    other participants in the payment systems, should not be put in
    the impossible position of making legal judgments about which
    individual businesses are or are not engaged in unlawful
    Internet gambling. That would create an unnecessary burden and
    require nongovernmental entities to make decisions that should
    be made by law enforcement agencies and the court system.
        Thank you for my time.
        [The prepared statement of Mr. Vallandingham can be found
    on page 156 of the appendix.]
        The Chairman. Before going to the next witness, I would
    like to apologize to the ranking member. Apparently on Tuesday
    afternoon, at 3:40, we did get an e-mail. I was busy with the
    markup on the Financial Services, but that is no excuse for my
    not having paid attention to this, so I apologize. We did get
    an e-mail. It was late Tuesday afternoon, but it was a request
    that Treasury, the Fed, and the Department of Justice should
    testify today. Obviously, it would have been better if it had
    come out earlier, in the sense that you don't usually give
    people 1 day's notice to testify. But I was wrong when I said I
    had not heard from the ranking member. Yes, his staff did send
    an e-mail on Tuesday afternoon at 3:40 asking for those
    witnesses, so I apologize for my comments.
        Mr. Bachus. Mr. Chairman?
        The Chairman. Yes.
        Mr. Bachus. Let me say this. What that e-mail says is that
    we want to again reiterate that we hope for them to testify.
        The Chairman. I understand that, but I had no previous
    iteration.
        Mr. Bachus. Right. And I will say this. I think what maybe
    we can both agree on is that the Treasury and the Fed at some
    later date will come and testify. I think that would be a
    solution we could both agree with.
        The Chairman. I agree, because they have postponed this for
    6 months, and we will be having a legislative hearing later on
    as well on--we are having one now, but we will. I got the
    reiteration, I didn't get the iteration, but I will accept it.
        Mr. Bachus. Thank you. As long as in the next few months,
    the Treasury and the Fed do come up.
        The Chairman. Let me just say, from my standpoint, the
    Federal Reserve gave one of the best cases against this whole
    operation I have ever heard, so I certainly have no hesitancy
    in having the Federal Reserve repeat that performance.
        Mr. Bachus. Right.
        The Chairman. Or reiterate it to you.
        Mr. Bachus. Thank you. I appreciate it.
        The Chairman. All right. We will now go back into the
    regular order. Next, we will hear from the Honorable Robert
    Martin, who is tribal chairman of the Morongo Band of Mission
    Indians.

      STATEMENT OF THE HONORABLE ROBERT MARTIN, TRIBAL CHAIRMAN,
                    MORONGO BAND OF MISSION INDIANS

        Mr. Martin. Mr. Chairman and members of the committee,
    thank you for providing us with this opportunity to comment on
    H.R. 2266 and H.R. 2267. I ask that my written testimony be
    made a part of the record.
        The Chairman. Without objection. And we have other
    statements that have been submitted both through the Majority
    and the Minority, and they will all be made part of the record,
    so please go ahead.
        Mr. Martin. My name is Robert Martin, and I am the tribal
    chairman of the Morongo Band of Mission Indians in Riverside
    County, California. I am speaking today on behalf of the
    members of my tribe, my tribal government, and the thousands of
    people we employ. Morongo is a federally recognized Indian
    tribe comprised of about 1,000 members, half of whom live on
    our 37,000-acre reservation located at the foot of the San
    Gorgonio Mountains between Los Angeles and Palm Springs.
        H.R. 2266 proposes a safe harbor for those currently
    engaged in illegal online gaming from the regulations mandated
    by the Unlawful Internet Gambling Enforcement Act for 1 year or
    until H.R. 2267 can be enacted. H.R. 2267 would authorize and
    create a licensing regime for the use of the Internet for
    various forms of online gambling and provides for the
    regulation of those games.
        We are here today to ask why Congress would want to protect
    foreign illegal operators to the detriment of existing American
    jobs. In summary, we stand in opposition to these bills because
    the legislation will do nothing but legalize offshore gaming at
    the expense of American jobs.
        The Indian Gaming Regulatory Act of 1988 was enacted to
    assist tribes in the development of reservation jobs. Under the
    1988 law, tribes were restricted to offer gaming only from
    Indian lands, and enactment of the legislation being considered
    today will place us at a competitive disadvantage relative to
    all other nongaming interests and current law. The Unlawful
    Internet Gaming Enforcement Act provides a constructive pathway
    for those who wish to offer Internet gaming on a State-by-State
    basis, and that law should be given time to become effective in
    its own right.
        Mr. Chairman, I am also troubled by the fact that the
    Treasury Department has now granted a 6-month reprieve from the
    implementation of the 2006 Unlawful Internet Gaming Enforcement
    Act. In a memorandum signed by President Obama on November 5,
    2009, the President declared his commitment to fulfilling the
    consultation requirement of Executive Order 13175, a directive
    originally issued by President Clinton on November 6, 2000.
    Executive Order 13175 calls for regular meaningful consultation
    in collaboration with tribal officials in the development of
    Federal policy. Tribes were not consulted on this extension of
    our interest in the law and were not considered. Jobs are being
    lost, and capital is fleeing our shores every day that the 2000
    Act fails to be enforced.
        Tribes generated $25.9 billion in gross gaming revenues.
    Tribes also produced another $3.2 billion in gross revenues
    from related resorts, hotels, restaurants, and other lodging or
    restaurant venues. Tribal gaming has created more than 600,000
    jobs nationwide. Tribal gaming has delivered $8 billion in
    Federal taxes and saved the government millions more in
    unemployment and welfare payments.
        We have invested in our operations because we have been
    encouraged by the U.S. Government to do so. By following the
    law, we are now facing unfair competition as a result of the
    threats of these bills. Please allow the current regulatory
    scheme to work and protect that which we have so carefully
    built.
        Thank you for your consideration of our concerns.
        [The prepared statement of Mr. Martin can be found on page
    49 of the appendix.]
        The Chairman. Next, is Ms. Parry Aftab, who is executive
    director of WiredSafety.

       STATEMENT OF PARRY AFTAB, EXECUTIVE DIRECTOR, WIREDSAFETY

        Ms. Aftab. Thank you, Chairman Frank, Ranking Member
    Bachus, and members of the House Committee on Financial
    Services for giving me the opportunity to testify here today.
        It is interesting as I have heard both opening statements,
    we agree at WiredSafety that children need to be protected. All
    of us are unpaid volunteers in a grassroots organization that
    is the world's largest and oldest Internet safety organization.
    I have about 16,000 volunteers in 76 countries around the
    world. We care desperately about the issues here. We act as an
    Internet safety organization and a help group dealing with all
    digital risks, all demographics and all digital technologies.
    We were appointed as one of the 29 members of the Internet
    Safety Technical Task Force that was run by the Berkman Center
    at Harvard, and appointed to issue a report to 49 of the 50
    States attorneys general, and I was recently appointed as one
    of the 24 members of the NTIA working group on online safety
    that was commissioned to render a report to Congress in June of
    this coming year on child safety issues. We advise local and
    Federal and State and international governmental agencies and
    nonprofits.
        Personally, I am an Internet privacy and security lawyer,
    but I haven't practiced law in a long time since creating the
    charity and donating my time to running it. In 1997, almost 13
    years ago, I wrote the very first book on Internet safety for
    parents called, ``The Parents Guide to the Internet.'' My
    mother made me do it. It contained a chapter that dealt with
    online gambling. It was called, ``Are We Raising Riverboat
    Gamblers?''
        Three-and-a-half years after the launch of the Web, we
    recognized that online gambling was a problem, something
    parents didn't understand and weren't sure how to deal with. In
    1999, I wrote, ``The Parents Guide to Protecting Your Children
    in Cyberspace'' for McGraw-Hill that also contained a chapter,
    and it was replicated around the world as the book was
    rewritten and published in various jurisdictions.
        Most people are aware of the moral arguments against
    gambling. A lot of people are aware of the regulatory and legal
    issues. Few of them understand that this really is a consumer
    protection problem. That is why I am at this table today. I
    have been following online gaming issues for a very long time.
    They affect not only children and parents, but there are people
    who are problem gamblers of all ages. We also have senior
    citizens who get online and may be scammed by rogue sites which
    take their money and make them promises and never pay on those
    bets. And I get e-mails; I get about 1,000 e-mails a day from
    people who come to us for help, and many of those are relating
    to online gambling.
        Now, it is particularly interesting, and I call it ironic,
    that I am sitting here today saying that the only way to
    protect consumers from online gambling risks is by legalizing
    it. And I never thought I would ever say such a thing. But if
    we don't legalize it, we can't regulate it. And what I am
    finding now is that we are acting a bit like the ``hear no
    evil, see no evil,'' and we have taken an approach that the
    only way to address online gambling, illegal online gambling,
    is by regulating the money systems, the financial systems. And
    I think that is an important piece of an entire puzzle, but the
    other pieces aren't there yet.
        I think we need to both approach this from a holistic
    approach. We need to educate parents. We need to provide
    security software tools and parental control tools that are out
    there. Other countries are doing that. We need to make sure
    that if online gambling sites are regulated and licensed, we
    know who they are, we know who is behind them. We can look to a
    lot of the brick-and-mortar regulatory schemes for making sure
    that we are dealing with trustworthy people, and their books
    are open so we know what money they are taking in and what
    money they are paying out to make sure that their processes are
    in place.
        We can make sure that we teach the people who are gambling
    on these sites who are adults that use the latest technology to
    keep out everyone but adults. That means there may be some
    adults who aren't going to pass those screening tests, but it
    is a multilayer approach. And this technology has changed
    dramatically since the Children OnLine Protection Act case was
    first determined almost 3 years ago.
        There are lots of different systems that you can put in
    place which, when combined, will keep most of the kids out. Are
    they going to be able to keep a kid out if their father has
    opened up their online gambling account and forgot to close it
    off? Probably not, unless we put a system in place that closes
    that after the end of 15 minutes. Nothing is perfect, but
    whatever we do is better than what we have now.
        We need to make sure that these sites are also using the
    latest methods to keep out malware and spyware, and that they
    are protecting our data and the personal information that is
    being given to them.
        I do not advocate gambling anywhere; I advocate the
    protection of consumers and families and children.
    Representative Bachus and I are in full alignment, and I have
    many volunteers in his jurisdiction. We spend a great deal of
    time protecting children. As a citizen and a taxpayer, I would
    like us to have tax, but that is not why I am here. I think
    that we can put something together if we take the great minds
    in this room and outside and come together with something that
    will be a holistic approach and will look to the rest.
        I thought these things would work. I have been working in
    this area for a long time trying to come up with practical
    approaches, but rather than putting my opinion out there, we
    commissioned a study. It was indeed paid for by gaming
    interests, but very carefully done so that no one controlled
    the results. I didn't, and neither did they. And we turned to
    one of the most respected law enforcement officials and
    academics at the JFK Center at Harvard and asked him to look at
    existing regulatory schemes and look at all of the 10 risks
    that we identified and see if there is something outside of
    what I thought would work to put this together. You will be
    hearing from Mr. Sparrow shortly, and he can address those.
        But I think, if working together, we can address these
    issues, all of our common concerns. We can make a difference.
    And perhaps the law that exists right now is an important part
    of that. I can't opine as to that. I can only tell you we need
    to do something, because whatever we have right now isn't
    enough.
        [The prepared statement of Ms. Aftab can be found on page
    35 of the appendix.]
        Mrs. Maloney. [presiding] Thank you very much for your
    testimony today.
        Next, Professor Malcolm Sparrow.

      STATEMENT OF MALCOLM K. SPARROW, PROFESSOR, JOHN F. KENNEDY
                SCHOOL OF GOVERNMENT, HARVARD UNIVERSITY

        Mr. Sparrow. Thank you, Chairman Frank, Ranking Member
    Bachus, and distinguished members of the House Committee on
    Financial Services. My name is Malcolm Sparrow. I teach
    regulatory and enforcement policy and operational risk control
    mostly to government regulators at Harvard's John F. Kennedy
    School of Government. My background is in regulatory policy and
    practice rather than in any extensive prior knowledge of the
    gaming industry or gambling behavior per se.
        Parry Aftab has described the genesis of the report, and I
    think it is available to committee members, released yesterday.
    I think I should spend just a few minutes saying what the
    report does and what it does not attempt to do.
        Our analysis did not directly address whether online
    gambling should be legalized. In focusing on managing risks
    associated with gambling, we did not weigh moral arguments or
    religious objections, nor did we examine broadly libertarian
    arguments in favor of allowing adults to engage in pastimes
    that they may enjoy. Instead we concentrated more narrowly on
    the obligations of government to protect citizens in general
    and vulnerable groups of citizens in particular from any
    unnecessary exposure to harm. We sought to: first, identify the
    specific risks that are associated with or perceived to be
    associated with Internet gambling; second, determine what kinds
    of regulatory strategies would best control or manage those
    risks; and third, determine what we could say in advance about
    how effective such strategies might be.
        If you have a copy of my written testimony, the list of 10
    appears on page 3. I won't run through it now. It also appears
    in table 1 at the back of the testimony, where it makes some
    comparison between current protections and potential
    protections under a legalized and regulated regime.
        As Mr. Bachus commented, $6 billion is currently spent by
    U.S. residents gambling abroad at the moment. The status quo
    produces a situation where many U.S. residents use online
    gambling services despite existing statutory restrictions. The
    share of the U.S. global market is estimated to be between one-
    third and one-quarter of the global trade.
        The net effect of the attempts to prohibit online gambling
    has instead pushed gambling offshore. Sites are readily
    available to U.S. residents through the essentially borderless
    medium of the Internet. Some of the foreign sites are well-
    regulated, such as those based in the United Kingdom, Alderney
    and Gibraltar. And others are less well-regulated or completely
    unregulated, such as those in Antigua, Grenada or the Kahnawake
    Mohawk territory, Canada.
        As a result of the global gaming industry's adaptations to
    existing U.S. strategy, the United States finds itself in this
    position: The United States incurs all of the social costs
    related to U.S. residents gambling online. The United States
    exercises no jurisdictional control over the gaming sites that
    serve U.S. residents. The United States is unable to offer its
    own residents who choose to gamble on overseas sites any
    consumer protections or to implement any other harm-reducing
    strategies. And the United States is not able to qualify
    industry participants or even to exclude organized criminal
    groups from competing for the business of U.S.-based customers.
        The net conclusion of this report is that legalization with
    regulation would provide U.S. authorities the power to grant or
    deny licenses and to impose significant sanctions on non-
    compliant licensees. Such licenses would be extremely valuable
    to site operators. Compliance with any regulatory requirements
    and strict licensing conditions that Congress chooses to impose
    in return for the privilege of a license would therefore become
    a core business imperative for the gaming industry. I have
    examined the proposed legislation and believe it provides an
    adequate framework within which necessary safeguards could be
    designed and implemented.
        If the United States decides to legalize and regulate
    online gambling sites, we would expect that most U.S. resident
    gamblers would be diverted eventually from overseas sites
    towards reputable and trusted domestic operators. In the long
    run, reputable gambling operations under American control
    should come to dominate online gambling opportunities selected
    by U.S. residents. And if that happens, all categories of risk
    would be better controlled than they are at present, and I
    believe that U.S. consumers would be better protected.
        I am happy to assist the committee in any way that I can.
    Thank you, Mr. Chairman, for the opportunity.
        [The prepared statement of Mr. Sparrow can be found on page
    53 of the appendix.]
        The Chairman. Thank you.
        Next is Keith Whyte, who is executive director of the
    National Council on Problem Gambling.

       STATEMENT OF KEITH S. WHYTE, EXECUTIVE DIRECTOR, NATIONAL
                   COUNCIL ON PROBLEM GAMBLING (NCPG)

        Mr. Whyte. Chairman Frank, Ranking Member Bachus, and
    members of the committee, thank you for the opportunity to
    testify on these bills.
        The National Council on Problem Gambling is the national
    advocate for programs and services to assist problem gamblers
    and their families. As the advocate for problem gamblers, NCPG
    does not take a position for or against legalized gambling, but
    concentrates on the goal of helping those with gambling
    problems. We were founded in 1972 and have a 37-year history of
    independence and neutrality that makes the National Council on
    Problem Gambling the most objective and incredible voice on
    problem gambling issues. We are a 501(c)(3) not-for-profit
    corporation, and we do not accept any restrictions on our
    contributions.
        The National Council on Problem Gambling neither supports
    nor opposes H.R. 2266 or H.R. 2267. My purpose here today is to
    provide a broader perspective on problem gambling to assist the
    committee in its consideration of these matters, as problem
    gambling frequently comes up in the discussions of both
    proponents and opponents of the legislation.
        Problem gambling is an important public health disorder
    characterized by increasing preoccupation with and loss of
    control over gambling, restlessness or irritability when
    attempting to stop gambling, and/or continued gambling despite
    serious negative consequences. Approximately 2 million adults,
    which is 1 percent of the population, meet criteria for
    pathological gambling in a given year. An additional 4 to 6
    million adults, another 2 to 3 percent, plus 500,000 youth
    between the ages of 12 to 17 show less severe but still serious
    symptoms of a gambling problem in a given year.
        The estimated social cost to families and communities from
    gambling-related bankruptcy, divorce, crime, and job loss was
    almost $7 billion last year. Problem gamblers also have high
    rates of other health problems and disorders. But regardless of
    the legality of Internet gambling, millions of Americans today
    right now are experiencing gambling problems devastating
    themselves, their families, and their communities.
        The only research information we have on Internet gambling
    shows that Internet gambling in the United States, Canada, and
    the United Kingdom has the lowest participation rates of any
    form of gambling, whether legal or illegal.
        Internet gamblers are also extremely likely to gamble in
    multiple traditional forms, if you will, to the extent that it
    appears that Internet gambling is an add-on for people already
    involved in gambling. Internet gamblers who spend significant
    amounts of time and money, while relatively rare, are, of
    course, more likely to meet problem gambling criteria.
        While participation in Internet gambling by U.S. residents
    appeared to decline after the passage of the Unlawful Internet
    Gambling Enforcement Act, UIGEA, we did not see a decrease in
    indicators of gambling problems, such as helpline calls. If you
    will refer to my written testimony, we have a chart of the last
    10 years of helpline calls to the national helpline number,
    which is the largest problem gambling helpline in the world.
    There are a number of possible explanations, of course, for the
    continued rise in these statistics, including the fact that our
    timeframe is too short to see what impact UIGEA may or may not
    have had on rates of problem gambling in the United States or
    rates of help-seeking for problem gambling in the United
    States.
        It is likely that individuals with gambling problems will
    find the Internet attractive for pursuing their addiction. Risk
    factors for gambling problems on the Internet include high
    speed of play, perceived anonymity, social isolation, and, of
    course, the use of credit or noncash means to finance the
    gambling, as well as the 24-hour access. However, it is
    important to note many of these factors can also be found in
    more traditional forms of gambling. These factors are mutable
    and are not specific to any one form of gambling or one
    delivery system of gambling.
        The graphical interactive structure of the Internet
    provides an opportunity to create informed consumers with
    access to a variety of information designed to encourage safe
    choices and to discourage unsafe behavior. The technology also
    exists to allow players and operators to set limits on time
    wagers, deposits, as well as to exclude themselves. These
    programs can be improved by utilizing the data collected by
    these Web sites to develop profiles of general online wager and
    behavior.
        We urge the committee to add language to require operators
    as a condition of licensure to provide public access to de-
    identified data on player behavior for research purposes. It is
    important in that the gambling regulation is only a small part
    of a comprehensive solution for underage and problem gambling.
    A comprehensive solution would, of course, include funded
    programs for prevention, education, treatment, enforcement, and
    research to effectively address the mental health disorder
    problem gambling. It is regrettable that H.R. 2267 does not
    contain any funding for such programs.
        We call the committee's attention to H.R. 2906, the
    Comprehensive Problem Gambling Act of 2009, which would amend
    the Public Health Service Act to authorize Federal health
    agencies to address problem gambling and would appropriate a
    total of $71 million over 5 years for competitive grants to
    States, tribes, universities, and nonprofit organizations for
    the prevention, treatment, and research of problem gambling. We
    appreciate that Chairman Frank and several committee members
    are cosponsors of the bill, and urge all Members to support
    this groundbreaking legislation as--because, as Ranking Member
    Bachus said, problem gambling is a problem for us all.
        There is not a single cent of Federal money that is
    dedicated to the prevention, education, treatment, enforcement
    or research of problem gambling. We believe the most ethical
    and effective response to problem gambling issues raised by
    gambling and by Internet gambling regardless of the legality is
    a comprehensive public health approach. Problem gambling, like
    other diseases of addiction, will likely never be eliminated,
    but we can and must make better efforts to minimize and
    mitigate the damage.
        Chairman Frank and members of the committee, thank you for
    the opportunity to testify.
        [The prepared statement of Mr. Whyte can be found on page
    163 of the appendix.]
        The Chairman. Thank you.
        Next is Jim Dowling, who is representing the Dowling
    Advisory Group.

    STATEMENT OF JAMES F. DOWLING, PRESIDENT AND MANAGING DIRECTOR,
                         DOWLING ADVISORY GROUP

        Mr. Dowling. Good morning. I would like to thank Chairman
    Frank and Ranking Member Bachus for the opportunity to come
    testify here today. My name is Jim Dowling, and I have
    dedicated my entire adult professional life to fighting fraud
    and anti-money laundering and now terrorism financing.
        As a special agent with the Criminal Investigation Division
    of the Internal Revenue Service, I conducted numerous complex
    fraud and money laundering investigations. As an undercover
    agent, I infiltrated criminal organizations that were
    laundering money in an attempt to take them down and dismantle
    them.
        Later, as the anti-money laundering advisor to the White
    House Drug Policy Office, I provided anti-money laundering
    advice to ONDCP, Federal law enforcement agencies, Federal
    regulators, and the Intelligence Community. After retiring from
    government service, I now work with financial institutions and
    casinos to help them improve their anti-money laundering and
    anti-terrorism programs, along with those of casinos and
    financial institutions.
        I come here today as neither a friend nor a foe of the
    current legislation pending before this committee. I am here to
    talk about some of the perils from both fraud and anti-money
    laundering and terrorism financing here.
        Under the Unlawful Internet Gaming Enforcement Act, the
    burden placed upon financial institutions to identify and stop
    and block transactions relating to online gaming associations
    places them in a difficult position. It makes them become the
    law enforcement agency, and at times, the judge and jury as to
    what they are going to be doing there.
        I understand the reluctance of the Department of Justice to
    provide them with such a list which would, in effect, be out-
    of-date as soon as that list is published. And that is one of
    the perils that we have regarding Internet gaming.
        As you can see from my written comments on this matter,
    there are wildly exaggerated figures on one side and down to
    some more conservative figures as to how much is involved in
    Internet gaming. The reason that those figures vary so widely
    is because it is right now illegal and people are reluctant to
    tell you how much they are making. But nonetheless, it is safe
    to say that there are billions of dollars at stake here.
        If you take a look at some of the advisories that have come
    out from the Financial Action Task Force, also known as FATF,
    it is recognized as the global leader and benchmark for all of
    the governments in the world to identify fraud, money
    laundering, and terrorism financing. FATF has issued three
    advisories relating to the perils and pitfalls of not only
    Internet gaming, but gaming in particular in the threats for
    money laundering and terrorism financing.
        If you look at some of the specifics that they mention in
    that report, they identify some of the challenges that would be
    met by someone trying to regulate Internet gaming. And some of
    those challenges, I would have to say, are rather significant.
        In addition to that, several years ago, the GAO presented a
    report to this very committee which talked about the challenges
    in trying to regulate an online gaming industry. Some of those
    challenges still exist today, but have only become exacerbated
    because of the advances in technology and the perils that would
    be caused because of that.
        In addition to that, FinCEN has recently issued an advisory
    regarding land-based casinos and some of the challenges that
    are faced there and some of the money laundering threats that
    would come from there.
        If you take a look at land-based casinos, whether they are
    tribal or other types of casinos, they have very good policies
    and procedures in place regarding customer identification
    programs which is required under 31 CFR Part 103.
        If you take a look at some of those things that casinos do
    now, they have very sophisticated electronic systems that help
    them identify people who are actually conducting the gaming in
    their institution. That is supplemented by actual foot
    surveillance that is in casinos. And that is usually backed up
    by a strong compliance department which does transactional
    monitoring to determine what the particular gamblers are doing
    there.
        Supplementing all of those systems is an independent State
    regulatory agency that each casino has, whether it is tribal or
    other, and those individuals are on the casino floor 24-hours-
    a-day, 7-days-a-week, 365-days-a-year to supplement what the
    casino's doing to prevent money laundering, terrorism
    financing, and fraud issues in their casinos. This is something
    that casinos on the Internet would not be allowed to do and
    could not possibly do.
        If you take a look at the fact that a casino could not do
    proper customer identification and to make a valid
    determination as to who was actually doing the transaction, who
    is actually doing the gambling, it is impossible also for them
    to conduct an OFAC check, which as we know is something that we
    need to pay particular attention to here in the United States.
        And then the other issue about this--
        The Chairman. Mr. Dowling, you are over your time, so could
    you wrap it up, please?
        Mr. Dowling. --would be the regulator being able to
    regulate foreign companies. I would like to thank the committee
    for the opportunity to testify here today, thank you.
        The Chairman. Thank you, we can explore those issues
    further in the questions.
        [The prepared statement of Mr. Dowling can be found on page
    44 of the appendix.]
        The Chairman. Finally, Mr. Michael Brodsky.

      STATEMENT OF MICHAEL BRODSKY, EXECUTIVE CHAIRMAN, YOUBET.COM

        Mr. Brodsky. Good morning, Mr. Chairman, Ranking Member
    Bachus, and members of the committee. My name is Michael
    Brodsky, and I am the executive chairman of Youbet.com. We are
    one the largest legal online wagering companies in the United
    States. Our company operates under the Internet Horse Racing
    Act of 1978, and we only accept wagers on parimutuel horse
    races. I should also note that 2 weeks ago, Youbet and
    Churchill Downs, owner of the Kentucky Derby, announced that
    Churchill would acquire Youbet, but that deal has not yet
    closed. I am appearing here today solely on been behalf of
    Youbet.com.
        In my testimony today, I will address the scope and scale
    of current illegal Internet gambling, discuss why I believe
    legalization is the only plausible solution to this problem,
    and how technology that exists today can be utilized to
    successfully regulate online gambling. But first, Mr. Chairman,
    I want to thank you for your strong support of a rational
    approach to legalize Internet gambling and for holding this
    hearing today.
        I have long admired your stance on this issue, Mr.
    Chairman, because you have accurately described it as a
    question of personal freedom and of common sense. You need only
    look at lottery sales, bingo halls, charitable gaming
    festivals, and parimutuel and casino gambling facilities
    throughout the country to see that legal forms of ``brick and
    mortar'' wagering are established, accepted, and regulated in
    our country. Why should most forms of online wagering be
    illegal?
        Illegal Internet gambling in the United States is happening
    now and it is growing. It is a big business involving billions
    of dollars a year, and with the exception of parimutuel horse
    racing, U.S. Internet gambling is all underground, it is
    untaxed, and it is unregulated. These billions upon billions of
    dollars are leaving our country, totally untaxed with U.S.
    regulatory authorities having no control or knowledge of where
    their money is going.
        Today's illegal online gambling is a ``wild west'' affair.
    No meaningful curbs on underage gambling, no recourse for
    misdirected funds, no attempts to aid problem gamblers and no
    tax revenues for the United States. As with prohibition,
    illegal online gambling is thriving as an underground economy.
    The vast majority of the people who gamble online are law
    abiding citizens who want to wager on a system that has
    integrity and security. The only way to put any controls on
    Internet gambling is to legalize it and regulate it.
        At Youbet, we are first and foremost technology people. We
    understand how to run an E-commerce business, what works and
    what doesn't. And let's be clear about this, in this Internet
    age, trying to maintain a U.S. ban on Internet gambling is a
    losing proposition. It is virtually impossible to slow it down,
    much less stop it. Other members of our Youbet senior team and
    I have been executives at leading edge technology companies
    such as Orbitz, Ticketmaster, CareerBuilder and Network
    Solutions. And we understand how technology can be used to
    safeguard consumers.
        I understand the concerns about underage gambling. As a
    parent, I want to see online gambling legalized. Why? Because I
    want it managed. As a society, we can make Internet gambling
    operators subject to U.S. supervision, holding operators
    accountable. The fact is that enacting H.R. 2667 is the most
    effective way to achieve the stated goals of the some of the
    bill's harshest critics.
        Today's out of control Internet gambling situation was made
    possible by the revolution of technology and it will take
    technology to fix it. Today at Youbet, we use technology that
    would ensure effective regulation of Internet gambling. The
    already-existing, totally legal, online parimutuel horse racing
    wagering industry is a U.S.-based model of how to provide a
    responsible, online wagering experience for adults, one that is
    clean, regulated, and scrupulous about both collecting and
    paying taxes. Youbet.com is a public Sarbanes-Oxley-compliant
    company that uses the latest technology and vigorously
    maintains its own Youbet responsible wagering program that we
    have developed over the past 13 years.
        It is designed to prevent underage gambling and to combat
    problem wagering. This technology enables us to conform to all
    Federal laws and the laws of those States in which we operate,
    including meeting all tax withholding and reporting
    requirements.
        Regarding money laundering, the proposed legislation has
    strict requirements in order to gain and keep a license. All
    companies will need to have a robust system in place to combat
    this money laundering. Existing technology would allow
    operators to track and monitor for it and licensees would work
    closely with Federal authorities to combat it. Operators have a
    tremendous incentive to fight vigorously against money
    laundering, because consumers will strongly prefer to do
    business only with companies they trust, ones with safe and
    secure systems. As an operator, we would run a great risk of
    destroying our own business if there is the slightest
    perception that our systems lack this integrity. I would also
    add that in today's offshore unregulated world, there is little
    incentive on the part of current illegal operators to detect
    and deal with money laundering.
        The Chairman. Your time is running out.
        Mr. Brodsky. Mr. Chairman, Congress today faces a stark
    either/or public policy choice. We can either legalize and
    regulate online gambling or allow it to continue to flourish in
    an offshore black market that allows easy access. Thank you for
    the opportunity to testify today, and I look forward to
    answering any questions.
        [The prepared statement of Mr. Brodsky can be found on page
    39 of the appendix.]
        The Chairman. I will begin the questioning.
        Mr. Martin, I understand your concern about discrimination
    and let me say that my intention would be, if we do this, to
    remove any restrictions so that if there is an opportunity
    there, you could be fully involved. Now I understand that might
    involve the Indian Gaming Act, which we don't have jurisdiction
    over, but it would be my intention to work to do that. As I
    understand it, and as I read what the tribe is trying to do,
    you are not opposed to Internet gambling, you are opposed to a
    situation in which you are at a competitive disadvantage to
    others; is that correct?
        Mr. Martin. Yes, that is correct.
        The Chairman. I appreciate that, because the criticisms
    that have been made of Internet gambling, obviously you don't
    agree with them, in fact, the tribe would like to do Internet
    gambling and I think that is right. So I will just tell you
    that there is certainly nothing conscious in our legislation to
    discriminate against you. I gather it is the effect of existing
    legislation that might do that, and I would work very hard to
    try and deal with that.
        And I know there are people who deal with the matters of
    the tribes--Congressman Kildee, who is a great friend, and
    others who would be sympathetic. So I would undertake to work
    them to say that whatever was allowed was allowed for you as
    well as for anybody else. No objection.
        Mr. Martin. But that does affect the job issues.
        The Chairman. If you are able to participate, you want to
    be able to do it and have nobody else do it, is that the issue?
        Mr. Martin. Well, no. Our concern is jobs being shipped
    overseas or off the shores.
        The Chairman. So you have no objection to Internet
    gambling, in fact, you would like to be involved in Internet
    gambling, the tribe would, correct? I gather the tribe has been
    working to try to get Internet gambling made legal.
        Mr. Martin. Yes, that is correct in certain forms, yes.
        The Chairman. So the question is the anti-competitive
    effect. And there was always this issue of whether we can do
    something in a way that--the jobs impact, I agree, is a
    separate question, but I did want to make clear there was no
    objection to Internet gambling.
        Let me just go down to the question of other legislation.
    Mr. Whyte, there is nothing in this bill that provides funding
    because we don't have the jurisdiction to provide funding. I am
    a cosponsor of the bill that you mentioned that Mr. Moran of
    Virginia supports and we would be supportive of doing that. Let
    me ask you, one of the problems that people in the banking
    industry have told us is Mr. Brodsky talked about horse racing,
    and there appears to be a difference of opinion as to the
    extent to which betting on horses would be or wouldn't be
    covered. Does anyone here have any opinion on what the state of
    the law is and whether that needs to be clarified?
        Let me ask Mr. Vallandingham: Are the banks that you are
    representing here today clear on what would or would not be
    prohibited if the law is allowed to take effect?
        Mr. Vallandingham. In all honestly, in response, Chairman
    Frank, right now we would have the responsibility of
    determining what is legal and what is illegal. If you--
        The Chairman. What about horse racing and betting on
    horses, is that in your--in the view of the people advising
    you, is that legal or illegal? I gather you can get different
    opinions depending on which Federal agency--
        Mr. Vallandingham. We do. In the 2006 testimony that I
    participated in, DOJ said it was illegal. I have no reason to
    believe that it is not legal. But with the license--
        The Chairman. The Department of Justice said it was
    illegal?
        Mr. Vallandingham. At the time, yes.
        The Chairman. Nothing has been done to change that since
    then.
        Mr. Vallandingham. Correct. With the licensing scenario
    where the Treasury would be responsible for deeming who is
    licensed and who isn't licensed, that takes the onus off the
    financial institution, because we could simply say, you either
    have a license and we will open an account for you or we won't.
        The Chairman. Let me ask Mr. Brodsky, we were told Treasury
    said one thing, and Justice said another about the law. To tell
    private citizens they have to carry out the law when the
    Federal agencies can't tell them what it says seems to be a
    problem. How does that affect your operation?
        Mr. Brodsky. Well, certainly the confusion associated with
    whether or not what we are engaged in is legal adds to the
    complication of our conducting our business. I will tell you
    that 88 percent of all the wagers placed on parimutuel handling
    in the United States are transmitted across State lines
    electronically.
        The Chairman. And that is illegal according to the
    Department of Justice?
        Mr. Brodsky. Assuming that interpretation is correct.
        The Chairman. Well, that is what the Department of Justice
    says.
        Mr. Brodsky. Eighty-eight percent of the entire parimutuel
    industry is conducted electronically across State lines.
        The Chairman. Well, let me say, that is another reason why
    I don't like the whole wall, but for domain and regulations to
    impose regulations for financial institutions, when that
    fundamental uncertainty hangs over them, in and of itself, that
    is the reason for the delay. The gentleman from Alabama.
        Mr. Bachus. Ms. Aftab, you commissioned the study, your
    organization, and then Professor Sparrow, you conducted the
    research?
        Mr. Sparrow. Yes, I was part of a team pulled together by
    the Brattle Group who took the job from WiredSafety.
        Mr. Bachus. Who paid for the study? Did your organization
    pay for it, Ms. Aftab?
        Ms. Aftab. WiredSafety paid for it and that was funded by
    the Poker Players Association of America and Harris, it was a
    pass-through direct cost.
        Mr. Bachus. So the gambling industry paid for the study?
        Ms. Aftab. They made a donation to WiredSafety and we paid
    for the study, but yes. Also the retain agreement with Brattle
    Group was very clear that there was no influence that was to be
    made by the people funding it.
        Mr. Bachus. No, no, no, I am just saying that it was paid
    for by the gambling industry.
        Ms. Aftab. It absolutely was. But our position on this--oh,
    I am sorry.
        Mr. Bachus. Some of what you concluded, I am looking at a
    study conducted and I am going to introduce it for the record,
    this is a letter I received December 2, 2009, from a coalition
    of researchers at the University of Illinois, the University of
    South Carolina, Notre Dame, Iowa State, the University of
    Nevada, Emory University, Baylor, and the University of
    Pennsylvania, and others and they make these conclusions,
    Professor Sparrow, and I just want to know if you would agree
    with them. This was part of the United States international
    gambling report.
        Are you familiar with that study? Some of their conclusions
    I am going to go with their subtitle conclusions, number 1, new
    addicted pathological gamblers and problem gamblers caused by
    decriminalizing Internet gambling. The percentages for teens
    and young adults has increased by 200 percent. Do you agree
    with that? Or do you think they were wrong in their conclusion?
        Mr. Sparrow. I don't have any data either to support or
    refute specific figures of that kind. The experts on gambling
    addiction that we interviewed have reported that addictive
    gambling rates have been holding roughly steady at 1 percent
    not only in the United States, but abroad for quite a long
    time.
        Mr. Bachus. I think that Annenberg also said that since of
    passage of our 2006 Act, that is when they leveled out, right?
        Mr. Sparrow. Well, I believe, I don't have the reports with
    me, but if I recall, there was a dip shortly after the passage
    of that.
        Mr. Bachus. So what we passed did cause a dip?
        Mr. Sparrow. It was in the public mind for a while, and
    then I believe it came back up again.
        Mr. Bachus. It did, in fact, come back up when the Treasury
    is not enforcing it. Let me say this, number 2, the second
    conclusion, gambling addiction is the fastest growing addiction
    among young people. Do you, Ms. Aftab or Mr. Sparrow or Mr.
    Whyte, do you think this was a correct assumption by that
    universities?
        Ms. Aftab. I think Mr. Whyte is probably the best one to
    address that. I am not an expert in other types of addiction.
        Mr. Whyte. Thank you, we do believe that gambling addiction
    is growing among young people and adults, although the rate
    still seems to be at roughly 5 percent of kids between 12 and
    17 would meet criteria for at least one gambling problem in a
    given year. Again, the research we have to date seems to show
    that rate, while it does seem to be trending upwards, is still
    within the same 5 percent rate. It is a serious concern.
        Mr. Bachus. Right. Now I notice you are the National
    Council for Problem Gambling.
        Mr. Whyte. Yes, sir.
        Mr. Bachus. And I think that Harrah's provided you with
    your initial funding for your online council counseling
    services; is that right?
        Mr. Whyte. I am not entirely sure. Harrah's is one of our
    corporate members, yes.
        Mr. Bachus. And on their Web site, they talk about how they
    are one of your chief benefactors.
        Mr. Whyte. They give us $5,000 a year, but yes, you are
    correct, they are certainly a long-term corporate member.
        Mr. Bachus. Let me ask you this, Internet gambling
    activities exemplify the most dangerous aspects of gambling.
    Would you agree with that?
        Mr. Whyte. Yes, we think that some of the features of
    Internet gambling, as I mentioned in my testimony, such as a
    high rate of play, use of credit or non-cash, 24-hour access,
    perceived anonymity, and social isolation are risk factors that
    are known in the gambling literature in general to be
    associated with problem gambling.
        Mr. Bachus. If I could say one final thing. One of their
    other five conclusions was increased legalized gambling
    increases suicide by creating new gambling addicts among
    adults, young adults and teenagers. Is that consistent with
    what you found?
        Mr. Whyte. Respectfully, there are many drivers of the
    suicide rates. We have never found a correlation on a national
    level. On an individual level, pathological gamblers are much
    more likely than others to consider and commit suicidal
    behavior. However, they are a small percentage of the
    population. It is hard to see their impact on national suicide
    rates, which vary greatly by many factors. So problem gamblers
    certainly have major suicidal concerns.
        Mr. Bachus. Thank you.
        The Chairman. The gentleman from Kansas.
        Mr. Bachus. Mr. Chairman, I ask unanimous consent to submit
    items for the record.
        The Chairman. Without objection, it is so ordered.
        Mr. Moore of Kansas. Ms. Aftab, I note that what you said
    on page 2 of your written testimony, ``After more than a decade
    analyzing the risks posed by unregulated Internet gambling it
    may be ironic, but I have reached a conclusion that the best
    way to protect the families and consumers in connection with
    cyber gambling is by legalizing it not outlawing it entirely.''
        As a former district attorney for 12 years, I know that
    protecting consumers, especially our children, is a top
    priority for most law enforcement officers and I think for
    people in our country generally. I appreciate your candor.
        Again, I agree with your conclusions, and I think our
    society is very interested in protecting consumers, especially
    our children, however best that can be achieved. It would seem
    to me that this kind of online gambling, given the use of
    technology and the Internet today will happen, whether we like
    it or not. Maybe not in this country, but in other places
    around the world. I am not a gambler and I really could not
    care less about gambling; it is not of any interest of to me.
    But I recognize there are people in this country and around the
    world who do. And if we are able to drive this activity into
    sunlight through a license regime, as the bill drafted by the
    chairman would do, I would think from a law enforcement
    perspective, we would be better able to keep track of scams and
    fraudulent activities; would you agree or disagree with that?
        Ms. Aftab. Sir, I am a big fan of the work that you have
    done in law enforcement over the years, and I absolutely agree
    with you.
        Mr. Moore of Kansas. Thank you. Mr. Vallandingham, thank
    you for your testimony as well.
        Mr. Vallandingham. Thank you.
        Mr. Moore of Kansas. Thank you, Mr. Chairman. I yield back.
        The Chairman. The gentleman from New York.
        Mr. Maffei. Thank you, Mr. Chairman. I wanted to just
    state, I have been a cosponsor of this legislation, and I, too,
    have never had any interest particularly in gambling, but it
    does seem to me that some of the difficulties where the
    gentleman from Alabama's arguments are, not that gambling
    doesn't have a lot of destructive effects, but what is the
    solution to that? How do you avoid those to the extent possible
    while still retaining freedom in our society? Indeed, we have
    had experience in our past with banning liquor.
        Certainly, alcohol creates far more destructive effects and
    yet that didn't work. It wasn't enforceable and it didn't work.
    So now we have a system of both selling liquor, it is highly
    regulated with wholesalers, etc., that I also support and think
    has worked well. This is the best analogy I can find to doing
    the same thing with online gambling, bringing it out in the
    open.
        I did want to ask Mr. Whyte in particular, but anybody who
    has an opinion I would take it. Mr. Whyte, in particular, what
    are the strategies that you would advocate if this were to
    become law and we are able to have these Web sites identify
    problem gamblers sooner? First, how would we identify some of
    the problem gamblers by having this regulation in place? And
    second, what could we do for them?
        Mr. Whyte. Thank you, Congressman Maffei. I think on your
    first question, how would the regulation be done, it is a
    little beyond the scope of our experience now, but we would
    look to the United Kingdom, which has had a regulatory system
    in place for a number of years. The rates of problem gambling
    do not appear to have dramatically increased during that time,
    although there is a concern about heavy usage among young
    males. We would look to the United Kingdom's experience and try
    to improve upon that, but I think the real heart of this and
    the point of your second question is that there is no public
    health safety net for problem gamblers right now in the United
    States.
        There is an immense amount that we need to do right now to
    prevent problem gambling, to educate people who do choose to
    gamble that gambling is an addictive activity, and to treat
    those for whom prevention education does not work. Enforcement
    is, of course, an important part and clearly laws like H.R.
    2267 would be part of the enforcement efforts. We also need
    research to close the loop and tell us what is working and what
    is not in the other four categories.
        Again, these are principles that are encompassed in H.R.
    2906, but we would just note that the safety net right now for
    problem gamblers is weak or nonexistent in many States,
    including New York. And whether or not this bill passes, that
    is where we have to start as a public health approach, we have
    to look at this like we look at substance abuse.
        Enforcement plays a role, but prevention, public health,
    education, and treatment, those are the best ways, especially
    to prevent youth from developing problems in the first place.
        Ms. Aftab. And we looked at this in the study, and if Mr.
    Sparrow would comment a bit, the technology could do a great
    deal to help problem gamblers.
        Mr. Sparrow. If it is useful to you, you will find a
    section of the report, pages 69 through 71, that actually lists
    a whole different set of technologies and approaches that other
    jurisdictions have used and refers to a series of reports that
    the European Union has laid out a set of up to 50 different
    systems or technologies that can be implemented on Web sites to
    help control it, but the most common ones are links to problem
    gambling, helplines, and Web sites mandated when you enter a
    site, self-exclusion programs, self-imposed time and money
    limits and mechanisms to set your own betting limits, rate of
    loss, etc., etc.
        One of the criticisms of such technologies is that you
    might have to first of all admit that you are a problem gambler
    before you called on any of these for help. But actually many
    of them can be framed without requiring such an admission so
    that when you first register with a site and without any kind
    of diagnostic or admission required up-front, you can, at that
    point, set any limits that you would choose to apply to all of
    your sessions.
        Mr. Whyte. One final note on the identification of problem
    gamblers, if I may. Internet gambling sites compile a massive
    amount of information. Every interaction is tracked, and these
    databases which are in the billion of transactions now can
    provide some enormous predictive power for researchers. This is
    why, following the model from the Swiss government, we call on
    the committee to consider adding a provision that as a
    condition of licensure, operators would make de-identified data
    publicly available to researchers, because when you comb
    through billions and billions of records, you will find
    predictive patterns, so you are not relying on the individual,
    but you are looking at things like time on sites, variation in
    bets, speed between bets. There is almost an unlimited set of
    parameters that you can apply to over billions of transactions
    to help us develop predictive profiles just as we do with the
    credit card industry.
        Mr. Maffei. Thank you very much.
        Mr. Brodsky. If I could just add something?
        Mr. Maffei. I am out of time, it is up to the chairman.
        The Chairman. Quickly.
        Mr. Brodsky. The only comment I would make is we have our
    own real life experience with problem gambling at Youbet. In
    the event, under any circumstance, we are aware that anyone has
    a problem, a gambling problem, we lock them out of our system.
    They are uniquely identified by a Social Security number.
        The Chairman. We appreciate that, and you can elaborate on
    that in writing. The gentleman from New York, Mr. King.
        Mr. King. Thank you very much, Mr. Chairman. Let me thank
    you at the outset for your cooperation on this issue and let me
    also express my regret that I was not here for the beginning of
    the hearing, and I have to leave very quickly. I am the ranking
    member on the Homeland Security Committee, which is right now
    holding the hearing on the White House crashers.
        Mr. Chairman, it is a hearing in which your talents would
    be ideally suited. It goes from reality TV to the most
    important constitutional issues, and a debate of separation of
    powers is going on right now. So we need someone who has a
    flair for expressing a point and also is well-versed in the
    Constitution. And so I have to go back, I am not as well-versed
    in the Constitution and not as nuanced as you, but I am giving
    it my best over there.
        Thank you for scheduling this hearing. And I also want to
    thank Ranking Member Bachus for his forbearance in putting up
    with me over the last several years on this issue. We don't
    entirely see eye-to-eye, but he has been a true gentleman in
    every sense of the word. And I will just make a brief
    statement, it would be inappropriate to come in and ask
    questions after so much has already gone on.
        But Mr. Chairman, we all know that when the Internet
    gambling prohibition was enacted in 2006, many voting for it
    meant well and thought it was the right thing to do, but it
    certainly has unintended consequences. And that means the
    purpose of today's hearings and why I so strongly support H.R.
    2266 and H.R. 2267, which I believe are essential to correct
    the situation that has developed.
        By licensing and regulating Internet gambling, it allows
    Americans to bet online by creating exemptions for operators to
    license and regulators, the Treasury Department would establish
    these regulations and license these Internet operators subject
    to various conditions, including criminal and financial
    background checks and the legislation also would not preempt
    State or tribal laws prohibiting Internet or sports gaming. All
    prohibitions are well-intended, sometimes they work, sometimes
    don't, usually they don't.
        In this case I don't believe it is, we are losing revenue
    and we are not achieving the social purpose that was intended.
    And we can go from pragmatic aspect of it of getting revenues
    that we should be having in our government today of actually
    regulating an industry where many people are involved offshore
    or the libertarian aspect of my good friend, Mr. Paul, who
    feels we should not be interfering in people's personal lives.
        So with that, Mr. Chairman, I certainly strongly support
    the legislation. When a markup comes, I will certainly support
    it and vote for it. I thank all the witness for being here and
    I really do regret not being able to stay. Again, there is a
    very intense hearing going on, on the other side.
        The Chairman. Does the gentleman yield?
        Mr. King. Yes.
        The Chairman. I appreciate his kind words and I noted in
    his absence as the former Chair and current ranking member on
    the Homeland Security Committee to the extent that there is a
    concern about money laundering, we will be drawing on his
    expertise, so I think many of us are reassured by his being
    here to participate when we put the right safeguards in.
        Mr. King. Thank you, Mr. Chairman. I appreciate that, and
    again, I agree with you, I see no Homeland Security or
    terrorist threat, however. If anything, regulation makes it
    less likely that there will be any significant threat. With
    that, I ask to submit my entire statement into the record. I
    yield back the balance of my time.
        The Chairman. Without objection. The gentleman from
    California, Mr. Sherman. And then I think if we all move
    quickly, we get to Mr. Lee, and then we can go to the vote.
        Mr. Sherman. I am a bit more skeptical than others of
    Internet gambling, traditionally we allowed the sovereign to
    decide what gambling goes on within its territory. Like
    alcohol, we have wet counties and dry counties, we have had wet
    States and dry States. If I was a member of a State
    legislature, I might well be for gambling and alcohol
    everywhere. As a Federal legislator, I have tended to grow up
    in a system in which that is decided at a State level. And when
    you are on cyber and tribal lands, at the tribal level.
        We now have a combination of technology, perhaps
    facilitated by Federal law, that will shift that and allow
    anyone anywhere to gamble legally whether the sovereign of that
    particular locality wants them to or not.
        As a matter of practicality, what we have done for most
    people in this country is we have made gambling something you
    have to take a road trip to do. You have to leave your house to
    lose your house. That has been a policy, I guess, and a lot of
    States have found that to be a good one. Now, you will be able
    to gamble in your own home. On the other hand, I am not sure
    that we can stop this anyway.
        With that, I would like to question Chairman Martin. I
    understand that you are opposing the legislation and Internet
    gambling here at the Federal level, but you are asking the
    California legislature to legalize online poker and perhaps you
    want to clarify that for us?
        Mr. Martin. Well, thank you. Yes, we are, that is correct.
    We are doing that along with several licensed card groups and
    additionally some other tribes are considering coming on board
    with us in a consortium of tribes and it is going to be--since
    we don't have--that is outside of our compact and that is--so
    that will be how is that actually going to work? That is
    outside of the Gaming Regulatory Act, that is what I was trying
    to say. And tribes don't currently have an exclusive right to
    online poker in California. So that will be looked at outside
    and the State will just look at it as another vendor, as just
    another business.
        Mr. Sherman. I will ask you a question where I kind of
    actually know the answer. Can you describe what kinds of fixed
    costs you have in operating your operation? I have been there,
    I have seen it and perhaps speak to what the other tribes have
    in the way of fixed costs that the online gambling industry
    does not have.
        While you are looking at your notes, I will point out that
    as far as I know, no one from Nevada is represented here, but
    Las Vegas is the epicenter of the foreclosure problem. I hope
    we don't do anything in the next couple of years that adversely
    affects what is the most struggling part of the country.
    Chairman Martin?
        Mr. Martin. Yes, I have the answer for you here. Congress
    must understand that while, in theory, the Indian Gaming
    Regulatory Act prohibits States from taxing tribes, in
    practice, States impose a tax on tribes under the terms of our
    tribal State compacts. The Morongo case, the tax imposed on us
    by the State for the privilege of securing our compacts is
    based on a rate of $3 million per month irrespective of the
    volume of business we do. That means every day we have to pay
    the State $100,000.
        Should Congress authorize full-scale Internet gambling to
    enter the marketplace that will bring competitive pressure that
    was not factored into our business decision and will make it
    very hard for us to meet the obligations we have and the
    business decisions we will make--excuse me, I missed that. For
    us to meet the obligation we have to the State. Not to mention
    our ability to provide for our tribal members and services, our
    outstanding debt obligation.
        Mr. Sherman. Mr. Brodsky, you are here from--
        The Chairman. Your time has expired.
        Mr. Sherman. My time has expired.
        The Chairman. Mr. Lee will ask the last question.
        Mr. Lee. I will be very brief. I apologize that I missed
    part of the hearing. I don't know if anyone out of the group
    can give me an idea on the online gambling, what percentage is
    done via credit card? Does anybody know what that number is, do
    you have an idea?
        Philosophically, my only point on this issue, because I am
    not here to weigh in on the rights or virtues of whether or not
    you should gamble online, I have my own personal views on that.
    One thing I don't believe that we should be allowing in
    Internet gambling is to allow someone to gamble with an
    unsecured loan, that being a credit card. If people choose to
    gamble their own money, that is one issue, philosophically. But
    when people are allowed to use an unsecured loan and ultimately
    other taxpayers are on the hook when they don't pay, then that
    is when people get themselves into trouble.
        I think if this market was limited strictly to, be it a
    debit card, but when you are allowing credit cards to go, and
    money you don't have to gamble, that, in my mind, is reckless.
    And that is the only comment I wanted to make sure got put in
    the record.
        I think that would be an interesting number to know, what
    percentage of the gambling is done by credit cards. Thank you,
    Mr. Chairman.
        The Chairman. Thank you. Let me ask if any of the members
    of the panel could find--would have information like that, they
    could send it to us. And with that, the hearing is adjourned.
    We will be returning to this subject next year.
        [Whereupon, at 11:37 a.m., the hearing was adjourned.]

                                A P P E N D I X

                                December 3, 2009

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