[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

                               ----------
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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.]






















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