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

                        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

                                 SECOND SESSION

                                   __________

                                 JULY 21, 2010

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 111-146

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    20402-0001

                     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:
        July 21, 2010................................................     1
    Appendix:
        July 21, 2010................................................    35

                                   WITNESSES
                            Wednesday, July 21, 2010

    Duke, Annie, professional poker player, on behalf of the Poker
      Players Alliance...............................................     6
    Fagan, Michael K., law enforcement/anti-terrorism consultant.....     8
    Malerba, Hon. Lynn, Tribal Chairwoman, the Mohegan Tribe.........    10
    Malkasian, Tom, Vice Chairman and Director of Strategic Planning,
      Commerce Casino................................................    12
    Williams, Edwin, President and Chief Executive Officer, Discovery
      Federal Credit Union, on behalf of the Credit Union National
      Association (CUNA).............................................    14

                                    APPENDIX

    Prepared statements:
        Paul, Hon. Ron...............................................    36
        Duke, Annie..................................................    37
        Fagan, Michael K.............................................    41
        Malerba, Hon. Lynn...........................................    48
        Malkasian, Tom...............................................    53
        Williams, Edwin..............................................    57

                  Additional Material Submitted for the Record

    Bachus, Hon. Spencer:
        Written statement from Americans for Tax Reform..............    62
        Letter dated July 20, 2010, to Hon. Sander M. Levin and Hon.
          Dave Camp from: John W. Suthers, Colorado Attorney General;
          Douglas F. Gansler, Maryland Attorney General; and Bill
          McCollum, Florida Attorney General.........................    63
        Letter from the Chamber of Commerce of the United States of
          America....................................................    65
        Letter from Concerned Women for America......................    67
        Letter from the U.S. Department of Justice, Federal Bureau of
          Investigation, dated November 13, 2009.....................    69
        Letter to Hon. Jon Kyl from Treasury Secretary Geithner,
          dated February 2, 2010.....................................    72
        Letter to House and Senate Leadership from various family
          groups, dated July 20, 2010................................    73
        Letter to Chairman Frank from the Financial Services
          Roundtable.................................................    75
        Letter from the National Association of Federal Credit Unions    77
        Article from msnbc.com, dated September 18, 2008.............    78
        Article from the Vancouver Sun, dated July 20, 2010..........    86

                        H.R. 2267, THE INTERNET GAMBLING
                        REGULATION, CONSUMER PROTECTION,
                              AND ENFORCEMENT ACT

                                  ----------

                            Wednesday, July 21, 2010

                 U.S. House of Representatives,
                       Committee on Financial Services,
                                                       Washington, D.C.
        The committee met, pursuant to notice, at 2:30 p.m., in
    room 2128, Rayburn House Office Building, Hon. Barney Frank
    [chairman of the committee] presiding.
        Members present: Representatives Frank, Waters, Sherman,
    Moore of Kansas, Clay, McCarthy of New York, Baca, Green,
    Cleaver, Hodes, Wilson, Perlmutter, Carson, Speier, Adler,
    Kosmas, Himes, Peters; Bachus, Paul, Biggert, Hensarling,
    Campbell, Bachmann, Marchant, Posey, Jenkins, Lee, and Lance.
        The Chairman. The hearing will come to order. I apologize.
    Obviously, we were put back by the White House statement and
    then by the votes, and I want to get right to it so we can get
    this done before the votes.
        We have 10 minutes for opening statements. I will take 4
    minutes for myself and waive them, so we will have 6 minutes
    left. I have 3 members who will get 2 minutes each. I recognize
    the ranking member for 5 minutes.
        Mr. Bachus. Thank you, Mr. Chairman. I would like to submit
    my full statement for the record.
        The Chairman. Without objection, anything anybody wants to
    submit will be made a part of the record.
        Mr. Bachus. And also, before we start the time, I would ask
    unanimous consent to--
        The Chairman. I just said anything anybody wants to insert
    can be inserted.
        Mr. Bachus. Okay, great.
        The Chairman. So let's not waste any more time. Go ahead.
        Mr. Bachus. Thank you, Mr. Chairman. The timing of today's
    hearing on Chairman Frank's proposal, legalized gambling over
    the Internet, strikes some of us as ironic, to say the least.
    After all the talk during the last year about shutting down the
    casinos on Wall Street, it makes no sense to me why we would be
    taking steps to open casinos in every home, dorm room, library,
    iPod, BlackBerry, iPad, and computer in America, many of which
    belong to minors.
        This morning, President Obama signed legislation, and
    proponents claim it will protect consumers from unwise
    financial decisions and predatory practices by financial
    institutions. This afternoon, the committee will consider the
    merits of a bill that will fleece Americans by reversing
    current restrictions on Internet gambling, which is perhaps the
    ultimate example of Americans making unwise and harmful
    financial choices. It seems that the Democrats' solicitude for
    the well-being and protection of American consumers has its
    limits.
        Since this Congress took action in 2006 to address the
    scourge of Internet gambling, criminal offshore gaming
    interests have been relentless in their campaign to repeal the
    law, or at least undermine it. In many quarters, they were the
    second or third leading lobbying group in Washington in dollars
    spent. Lots of these groups have innocuous names like, ``The
    Safe and Secure Internet Gambling Initiative.'' But in spite of
    their names, these are large corporate interests that are
    protecting the bottom line at the expense of addiction and
    destruction of our youth and our homes and communities.
        That is why it makes no sense to me how the same Democrats
    who claim they are protecting consumers by further regulating
    Wall Street can say with a straight face that unleashing
    Internet gambling will keep kids from becoming Internet
    gamblers.
        Now, regarding the potential for tax revenue, H.R. 2267
    provides a restrictive opt-out mechanism through which the
    States may decline to participate in the Federal licensing
    system. However, the Joint Committee on Taxation's most
    expansive--4 different estimates, $42 billion, is based on
    discarding even these State opt-out rights in favor of complete
    Federal preemption. The estimate that is most closely based on
    the text of Frank and McDermott's bill to regulate and tax the
    Internet indicate they will generate just $10 billion in
    Federal revenue. That wouldn't even pay for half of the funding
    needed for Chairman Frank's so-called Wall Street Reform bill.
        This rush to embrace Internet casino gambling seems at
    least partially motivated by the Majority's desperate search
    for more revenue to pay for an ever-bigger Federal Government.
    I ask my colleagues, ``How does raking in cash from gambling
    addicts differ from taking a cut from the heroin sold to drug
    addicts?'' Is the logic that if we don't, someone else will?
        I'm sorry, but the Federal Government should not take
    advantage of our youth, the weak and the vulnerable, in the
    name of new revenues to cover more government spending.
    Considering that the social and economic harm done to American
    families and to young people in particular from unlawful
    Internet gambling is well documented, I ask, is passing new
    legislation to create a Federal right to gamble that has never
    existed in our country's history, and Internet gambling taxes
    for more spending really worth it?
        Mr. Chairman, I strongly urge opposition of this bill. I
    yield back the balance of my time.
        I actually do have additional time, so I do want to say one
    other thing. If we were to tell our young people that they
    should not smoke or drink, and then we put a bottle of whiskey
    or a pack or a carton of cigarettes in their room, they might
    get a mixed message. And if this Congress continues to hope
    that our youth will not become addicted to gambling, there is
    no reason for us to pose the efforts that this bill does to
    allow Internet gambling on every computer in every dorm room
    and in every bedroom of our youth. It simply makes no sense.
        Thank you, Mr. Chairman.
        The Chairman. The gentleman from California, Mr. Sherman,
    is recognized for 2 minutes.
        Mr. Sherman. Thank you. In the past I have opposed this,
    saying you should have to leave your house to lose your house.
    I am re-evaluating. The two strongest arguments for the bill
    are contradictory, and yet they may both be true.
        One is that our technology is so weak that we can't prevent
    Americans from gambling on sites in Antigua, so we might as
    well try to regulate and tax it.
        The second argument is that our technology is so strong
    that, after the passage of this bill, we will use technological
    methods to make sure that those States that have opted out will
    not have their residents on these gambling sites, and that
    minors will be prevented from gambling.
        I do think there are two aspects of the bill that would
    deserve improvement. One is a simple technical fix, and that is
    if we're going to give States 180 days to opt out, it should be
    180 legislative days, according to that State's legislative
    calendar.
        The second is that I would want to prevent the bad actors,
    the ones that are violating our law today, from benefitting
    from this bill. First, those who are violating our law
    shouldn't benefit from the new law. Second, these entities have
    proven they can tap into the American market while providing
    zero American jobs.
        And, finally, we are going to rely on those who operate
    these sites to keep minors off, to respect State opt-out. And
    those entities that have proven that they can build a large and
    profitable business by defying and violating U.S. law should
    not be invited to play a role where they are going to have to
    act as policemen. We don't want the former criminals to be
    deputized as cops. I yield back.
        The Chairman. The gentleman from Texas, Mr. Hensarling, for
    2 minutes.
        Mr. Hensarling. Thank you, Mr. Chairman. First, I question
    the priorities of our committee, as we are here today. I know
    the ink is barely dry on the Fin Reg bill, but weighing in at
    over 2,000 pages, several hundred different rulemakings and
    studies, it seems to me that what we ought to be doing--and I
    am not trying to re-litigate the bill--is working to ensure
    that we can remove the greatest amount of uncertainty in the
    quickest amount of time, since uncertainty is the greatest
    impediment to job growth today.
        So, I question that priority. Clearly, this is a committee
    that, in the past, has already rolled the dice on the
    Government-Sponsored Enterprises. And yet, that clearly is not
    a priority, as we have prioritized Internet gambling over doing
    something about the Government-Sponsored Enterprises.
        The second point I would like to make is I understand the
    proponents have talked about the possibility of new revenues.
    To the extent those new revenues were actually used to reduce
    the deficit, I might be inclined to take a very careful look at
    support. But I'm afraid that simply new revenues to grow new
    government programs is, frankly, not terribly appealing to me.
        I have heard those who have argued that this is a matter of
    personal freedom. And, you know what? I would tend to agree
    with that argument if the cost associated with Internet
    gambling was internalized to that individual. But,
    unfortunately, given the social welfare state that has been
    created, the fact that we are a bail-out nation--I have seen
    many compelling studies from the Federal Reserve, talking about
    the incidents of bankruptcy linked to proximity of gambling
    casinos, and homelessness in Australia associated with the
    activity--I am not convinced that this could be internalized to
    the individual.
        And so, yes, I do believe freedom includes the freedom to
    do things we disagree with, but not at the cost of society.
        The Chairman. The gentleman from Indiana, Mr. Carson, for 2
    minutes.
        Mr. Carson. Thank you, Mr. Chairman. As a former law
    enforcement official, I am sensitive to the needs of protecting
    our citizens from the potential harms of gambling. However, I
    also see the economic benefits of the gaming industry.
        In order to protect our citizens, while opening the door to
    billions of dollars in potential revenue, a licensing and
    regulatory framework must be established to legitimize and
    control the Internet gaming industry. A ban on Internet gaming
    does not work. It has pushed the industry underground, leaving
    consumers completely unprotected.
        Here in the United States, we have the largest percentage
    of Internet poker players worldwide. This highlights our need
    to have a rational approach towards an industry that is not
    going away.
        I support a bill which establishes regulations over the
    gaming industry, and has protections against underage gambling,
    compulsive gambling, identity theft, and fraud. This new bill
    would include vetting potential licensees, which will ensure
    the safety and soundness of Internet gaming sites and high
    standards to prevent fraud and abuse of customers. This bill
    gives the people the personal freedom to gamble, and also
    generates revenues for our Nation.
        Consumers falling victim to financial fraud is one of the
    reasons why I introduced the Financial Literacy Act. This
    legislation helps community organizations to provide better
    financial education to young adults. It's clear that young
    adults may not understand the addictive nature of Internet
    gaming, which can cause reckless spending and debt, if not
    monitored.
        Thank you, Mr. Chairman. I yield back.
        The Chairman. The gentleman from California, Mr. Campbell,
    for 1\1/2\ minutes.
        Mr. Campbell. Thank you, Mr. Chairman. I don't gamble. I
    don't particularly like it. In poker, I always forget there is
    a straight and a flush, and which is which, and what is better
    than the other, and I forget all the time, which is why all my
    friends ask me to play with them.
        But freedom is not about legislating what I like to do and
    making illegal what I don't. Freedom is about allowing
    Americans to do what they want to do. And Americans clearly
    want to gamble on the Internet. They are doing it now. They are
    doing it illegally with sites that are from overseas, and poker
    players are banding--law-abiding citizens are banding together
    as poker players to play in what is now an illegal activity,
    not unlike the people who made stills and drinking during the
    age of Prohibition.
        There is no reason that we need to make all those law-
    abiding citizens into criminals. We can do this, we can
    legalize Internet gambling, and provide those people freedom,
    but also provide them protection, consumer protections that
    they are not currently getting on Internet sites that are
    overseas, protections that let them know how much of the
    winning is going to be paid out, how random numbers are
    generated, all kinds of things to protect those consumers who
    are not currently being protected.
        We can provide economic growth in this country by making
    sure that these legal gambling operations are located and sited
    here, rather than seeing that economic growth go somewhere
    else. And, in fact, maybe we will attract foreigners to
    American sites to actually bring something back to this
    country.
        And it has been mentioned we can also raise a little tax
    revenue without raising taxes. I yield back.
        The Chairman. The gentleman's time has expired. The
    Republican side has 1\1/2\ minutes left. The gentleman from
    Alabama seeks to be recognized for the remaining 1\1/2\
    minutes.
        Mr. Bachus. Thank you, Mr. Chairman. Mr. Chairman, I want
    to share four letters that I have from the Administration, and
    from attorneys general across the country.
        The first letter is from Tim Geithner. And in it he urges
    us to go ahead and implement the Unlawful Internet Gambling
    Enforcement Act. Of course, what your bill does is vitiates
    that. He also says that it's the position of the Department of
    the Treasury--and I would think that means the Administration--
    that no further extension of the compliance date set for June
    1, 2010, is warranted.
        He said, ``I believe that regulation is appropriate,'' and
    that's the regulation that the chairman wants to repeal, ``and
    will be cost-effectively carried out to enforce the purpose of
    the Unlawful Internet Gambling Enforcement Act,'' and that is
    to stop these criminal enterprises from operating.
        Third, he says, ``I believe the enforcement of the law will
    assist the United States in fighting the financing of illicit
    enterprises that threaten national security.'' So, at least we
    have from the Secretary of the Treasury a letter that says
    these sites are a threat to national security, which we
    shouldn't dismiss lightly.
        We also have a letter--
        The Chairman. The gentleman's time has expired.
        Mr. Bachus. Thank you.
        The Chairman. I will recognize myself now for 30 seconds
    just to read from a letter from the Financial Services
    Roundtable: ``We support your efforts to bring greater
    clarity;'' and ``We strongly support your efforts to create a
    licensing and regulation regime.''
        I should say that people in the financial industry are
    overwhelmingly supportive of this, because of the enormous
    burden the chosen form of regulation puts on them. They have to
    monitor--I will give myself another 45 seconds--they are given
    the enormous burden of trying to decide what payment was for
    what. And it's a great burden on credit unions and on banks.
    They are overwhelmingly opposed to it.
        The Chamber of Commerce of the United States of America
    supports H.R. 2267. They have significant concerns with its
    regulatory implementation. We hear a lot of complaints about
    regulatory burden, unless it's in the service of some people's
    particular view that they would like to impose on other people,
    in terms of their own personal moral code. And the Chamber
    strongly supports this bill.
        And then another--not always my ally--Grover Norquist--I
    guess I'll trade you for Tim Geithner; we'll work that out on
    this bill--``On behalf of Americans for Tax Reform, I write to
    express this organization's support for H.R. 2267. These are
    people who believe in individual freedom and choice, and the
    right of people to make their own decisions.''
        And finally, the National Association of Federal Credit
    Unions wanted to be on record here. And we also have, of
    course, a witness from the Credit Union National
    Administration.
        With that, we are going to turn to the witnesses. And I
    will call on the gentleman from New Hampshire to introduce the
    first witness.
        Mr. Hodes. Thank you, Chairman Frank. And thanks for
    holding this hearing. We have been trying to tackle the issue
    of online gambling since I joined the committee in 2007. And I
    am confident we are going to find a solution of where we find
    the right balance between appropriate regulation and consumer
    protection in making sure that personal freedoms are not
    infringed upon.
        I want to introduce one of the witnesses who is testifying
    today on behalf of the Poker Players Alliance, Ms. Annie Duke.
    Annie is a well-known poker player, not just in my hometown and
    in my district, where she was born and raised in Concord, New
    Hampshire, but across the country and around the world. Annie's
    family is well-known in New Hampshire. Her father, Richard
    Lederer, taught at St. Paul's school in Concord, and her
    brother, Howard Lederer, is also a famous poker player. She's
    an accomplished player, has an extraordinary background in
    education, and has been advocating for regulating online poker
    for many years, so I look forward to hearing from her and the
    rest of the panel on this important legislation.
        The Chairman. We will begin with Ms. Duke. One of our
    colleagues wants to make another introduction, but we will
    begin with Ms. Duke.
        Thank you for being here. You may proceed.

     STATEMENT OF ANNIE DUKE, PROFESSIONAL POKER PLAYER, ON BEHALF
                     OF THE POKER PLAYERS ALLIANCE

        Ms. Duke. Chairman Frank, Ranking Member Bachus, and
    members of the committee, I would like to thank you for this
    opportunity to testify regarding H.R. 2267, the Internet
    Gambling Regulation, Consumer Protection, and Enforcement Act.
        My name is Annie Duke, and I am a professional poker
    player. In fact, I have just returned from the World Series of
    Poker in Las Vegas, which is now the third most watched
    sporting event in the world. This year's World Series of Poker
    experienced a 20 percent increase in participants from 2009;
    much of this growth is driven by the popularity of Internet
    poker here in the United States and across the globe.
        I am here today to testify on behalf of the Poker Players
    Alliance, a grassroots organization of 1.2 million people who
    play poker in their homes, in card rooms and casinos, at bars
    and charitable events, and on the Internet. To be sure, the
    organization was founded in response to efforts to prohibit
    poker playing on the Internet, but our organization believes
    that the medium is irrelevant; our focus is the game.
        As a professional poker player, I am aware of the rich
    tradition this great American game has in Washington politics.
    Today, such Washington leaders as President Obama and Justice
    Scalia continue that tradition. These leaders and millions of
    everyday Americans play for recreation and relaxation, for
    intellectual challenge and stimulation, for fun and profit.
        But at stake in this debate is a far more important
    tradition for our country and its government. At its most basic
    level, the issue before this committee is personal freedom--the
    right of individual Americans to do what they want in the
    privacy of their own homes without the intrusion of government.
    From the writings of John Locke and John Stuart Mill, through
    their application by Jefferson and Madison, this country was
    among the first to embrace the idea that there should be
    distinct limits on the ability of the government to control or
    direct the private affairs of its citizens.
        More than any other value, America is supposed to be about
    freedom. In fact, it was Ronald Reagan who once said, ``I
    believe in a government that protects us from each other. I do
    not believe in a government that protects us from ourselves.''
        I believe that many of those who seek to prohibit Internet
    gaming and Internet poker are motivated by good intentions: to
    protect the roughly 1 percent of people who are subject to
    pathological gambling; and to prevent minor children from
    gambling online. But the good news here is that public policy
    need not decide between respecting individual freedoms and
    protecting vulnerable populations in the context of Internet
    poker. Both of these goals are best served by appropriate
    licensing and regulation, and this is exactly what H.R. 2267
    proposes.
        To be clear, H.R. 2267 is not a bill that expands Internet
    gambling in America. It simply provides the appropriate
    government safeguards to an industry that currently exists and
    continues to grow and thrive. American poker players are not
    content with a system where they are limited to play on
    offshore sites regulated by foreign governments. They want to
    play on sites licensed in the United States, which will provide
    even greater consumer protections for the player and yield
    badly-needed tax revenue for State and Federal Governments.
        Under a U.S.-regulated system, an authorized licensee would
    be required to have technologies in place to: prevent minors
    from playing; identify and restrict problem gamblers; and keep
    people in opt-out States from playing online. Further,
    regulation would eliminate any concerns about money laundering.
    Through regulation, a licensed site would be required to adopt
    the same stringent and effective anti-money laundering measures
    as banks have in place today.
        As a mother of four, I am acutely aware of the need to
    protect children on the Internet. Interestingly, the current
    law provides no consumer protection whatsoever. The UIGEA does
    not keep a single child off an Internet gaming site, nor does
    it provide any protections for problem gamblers, or mechanisms
    to prevent fraud and abuse. It only regulates banks, not those
    who operate the games. H.R. 2267 corrects this untenable
    posture, and puts us in the greatest position to protect
    consumers, minors, and vulnerable populations.
        Mr. Chairman, I would like to close with the point I
    started with: this issue is about personal liberty and personal
    responsibility--the freedom to do what you want in the privacy
    of your own home. I suspect that some on this committee support
    freedom, except where individuals would use that freedom to
    make what they believe to be bad choices. ``Freedom to make
    good choices'' is an Orwellian term for tyranny--the
    governments of China, Cuba, and Iran all support the freedom of
    their citizens to make choices that their governments perceive
    as good.
        For those whose religious or moral beliefs hold gaming as
    abhorrent, I fully support their right to live by those
    beliefs. I support their right to choose to not gamble. What I
    do not support, and what this committee and this Congress
    should not tolerate, are laws that seek to prevent responsible
    adults from playing a game we find stimulating, challenging,
    and entertaining.
        H.R. 2267 provides this freedom in a safe and regulated
    environment and I urge everyone on this committee to support
    this commonsense policy. However you might feel about gambling
    on the Internet, I would suggest that gambling with freedom is
    far more risky.
        Mr. Chairman and members of the committee, I thank you for
    this opportunity to address you today, and I look forward to
    the testimony of my fellow panelists and the opportunity to
    engage with you during the question-and-answer period.
        [The prepared statement of Ms. Duke can be found on page 37
    of the appendix.]
        The Chairman. Thank you.
        Next, we have Mr. Michael Fagan.

     STATEMENT OF MICHAEL K. FAGAN, LAW ENFORCEMENT/ANTI-TERRORISM
                               CONSULTANT

        Mr. Fagan. Good afternoon, Chairman Frank, Ranking Member
    Bachus, and your fellow honorable Representatives and committee
    staff. I am Mike Fagan, a thorn between two roses here. I'm a
    private citizen representing no one but myself. I have served
    as a career prosecutor for 30 years. From 1996 to 2008, I
    probably had as much or more involvement as anyone in
    investigation and prosecution proceedings concerning Internet-
    based gambling.
        Given my responsibilities, I frequently had occasion to
    reflect upon the growth and variety of means of gambling in the
    United States. I have no religious, moral, or philosophical
    attitude against gambling, nor some Libertarian or pseudo-
    Libertarian attitude in favor of legalizing Internet gambling.
        Before Congress takes the extreme step of refuting and
    jettisoning our national history and tradition of letting local
    and State governments decide what vices will be prohibited or
    permitted and at what levels, Congress should first direct and
    fund the Department of Justice and/or the State attorneys
    general to enable a coordinated, systematic task force approach
    to enforcing existing laws prohibiting and taxing such conduct.
        And on that last point, taxing, offshore online casinos and
    sports books doing business in the United States sometimes say,
    ``Gee, we want to pay taxes in the United States; just legalize
    us.'' But they're already subject to the wagering excise tax,
    yet not a one of them, to my knowledge, has ever voluntarily
    forwarded a penny of this tax to the United States.
        Instead, they're now trying to get this committee and
    Congress to legalize remote control gambling, and to set tax
    rates extraordinarily favorable to them, as compared to the
    much higher tax rates that are applicable, for example, to
    brick-and-mortar casinos and to race tracks and riverboat
    gaming. Such an approach is consistent, in my experience, with
    the corner cutters and sharp operators in the Internet gambling
    world who were often associated, in my experience, with
    organized crime groups, or mimicked their ways.
        The deeper our investigation would go into these
    operations, we could count on finding additional criminality,
    or at least predatory behavior, outright fraud, threats,
    coercive tactics, point shaving, cash payments to steer
    athletes to certain agents or programs, illegal drug use and
    distribution, the investment in and operation of illegal online
    pharmacies, sophisticated money laundering, tax evasion--
    equivalent to the techniques used by drug lords--and terrorist
    financing opportunities. All these things were present in
    investigations that I oversaw.
        On that last point, I cannot comment on specifics in the
    United States, but a British publication, ``Policing,'' noted
    this past February that the United Kingdom's security services
    are running 23 ongoing investigations into the exploitation of
    gambling Web sites to finance terrorism.
        Legalizing and regulating Internet gambling in the United
    States would do nothing to limit that risk. And, by increasing
    the total number of avenues to move and hide and disguise
    money, it actually increases the risk, enabling, for example,
    these sites to serve the same functions as hawalas. The cost of
    legalization, regulation, and taxation simply do not outweigh
    these many negatives.
        A $43 billion figure in expected revenues put before the
    committee is not based in reality. There will be far smaller
    figures, based on the opt-outs, if this bill would be passed.
    The far smaller revenues, of course, will be offset by losses
    in taxes from jobs. Particularly cruel will be the loss of jobs
    for Native Americans in their casinos. No satisfactory
    requirement exists in the bill for the operators to be based in
    the United States completely and entirely. There will be
    outsourcing of elements of these offshore casinos--or
    authorized casinos, should the bill be passed.
        There will be no means of effective law enforcement for
    these offshore elements of the online casinos. The bill has no
    mandate for adequate employee background checks, nor for
    regular and meaningful certifications of the equipment and
    software and of the suppliers, to ensure honesty and integrity
    in the business.
        Astonishingly, no bar exists in the bill, as proposed, to
    keep out those who have purposely disregarded Federal law. This
    puts at a huge disadvantage those in the United States who have
    operated their land-based gambling business in compliance with
    the law. It's like if you legalized illegal drugs, and turned
    over the business to the Cali Cartel or Colombian or Mexican
    drug lords. What message does that send to the business
    community? Years of compliance bring you a stab in the back,
    delivered to you by your government.
        The bill provides insufficient assurance of effective
    regulation. Indeed, if legalized, Internet gambling, by its
    speed, nature, size, and scope will preclude effective and
    affordable regulation. You will never find the needle in an
    electronic haystack, given the volume of transactions.
        The bill, simply put, is the fertilizer for the creation of
    networks of misery. A pathological or problem gambler doesn't
    just hurt himself. Internet gambling promises to increase the
    rate of pathological problem gambling, and I certainly would
    dispute Ms. Duke's cite of 1 percent on that figure.
        The bill also portends a fundamental change in government
    relations between Federal and State Governments, and the
    everyday lives of our citizens. Prepare your constituents, if
    you pass this bill, for intense and aggressive and inescapable
    advertising and marketing ploys which, over time, do change
    behaviors. We have not even tested fairly--
        The Chairman. Mr. Fagan, your time is expiring.
        Mr. Fagan. Thank you.
        [The prepared statement of Mr. Fagan can be found on page
    41 of the appendix.]
        The Chairman. Does the gentleman from Connecticut have an
    introduction to make?
        Mr. Himes. Yes, Mr. Chairman.
        The Chairman. The gentleman from Connecticut is recognized.
        Mr. Himes. Thank you, Mr. Chairman.
        It's a pleasure to introduce Mohegan Tribe Chairwoman Lynn
    Malerba to testify before the committee today. She is Tribal
    Chairwoman of the Mohegan Tribe, and will be inducted on August
    15th to be Chief of the Tribe, the first female Chief of the
    Tribe in 300 years of that Tribe's history.
        In her position, the Chairwoman oversees approximately
    1,800 tribal members, and the operations of the Tribe's casino
    at the Mohegan Sun, which has been an important contributor to
    the Connecticut economy. She has a background as a director of
    health and human services for the Tribe, and a background in
    nursing.
        Most importantly, Mr. Chairman, she is an inheritor of a
    long tradition of this Tribe of what they call the ``Mohegan
    Way,'' which is hundreds of years of cooperation with the
    Federal Government in a constructive way. And, therefore, it's
    a pleasure to welcome the Chairwoman and I anticipate her
    testimony.
        Thank you, Mr. Chairman.
        The Chairman. Ms. Malerba, please go ahead.

    STATEMENT OF THE HONORABLE LYNN MALERBA, TRIBAL CHAIRWOMAN, THE
                             MOHEGAN TRIBE

        Ms. Malerba. Good afternoon, Chairman Frank, Ranking Member
    Bachus, and members of the committee, and Congressman Himes.
    Again, my name is Lynn Malerba, Chairwoman of the Mohegan
    Tribe. It is a great honor to be with you today to present
    testimony on H.R. 2267, the Internet Gambling Regulation,
    Consumer Protection, and Enforcement Act.
        As you have heard, our Tribe has a philosophy known as the
    ``Mohegan Way,'' which stresses cooperation, rather than
    conflict, when the Tribe is faced with a difficult decision or
    problem. This tradition started with our great leader, Sachem
    Uncas, who sought to protect our Tribe's sovereignty,
    traditions, and people in the face of European colonization,
    disease, and new technologies previously unknown to our people.
        Chairman Frank, since the day you introduced H.R. 2267, you
    have shown your great respect for tribal sovereignty by
    actively seeking the input of Tribes in your legislation to
    ensure that we are treated fairly. In doing so, your actions
    have shown that you have a desire for cooperation, rather than
    conflict, in the spirit of the Mohegan Way.
        In response to your invitation to cooperation, the Mohegan
    Tribe has joined forces with a coalition of other leading
    gaming Tribes from Connecticut to California, in order to work
    with you and your staff in addressing the issue of Internet
    gaming. Our goal is to make suggestions on how to further
    improve H.R. 2267 to ensure all Tribes may reap the benefits of
    Internet gaming if they choose to do so. Our coalition includes
    the Mississippi Band of Choctaw, the Barona Band of Mission
    Indians from California, and all member Tribes of the
    California Tribal Business Alliance.
        Indian gaming has been the biggest single economic
    development success story in tribal history. Since the
    enactment of the Indian Gaming Regulatory Act in 1988, Tribes
    have opened 419 gaming facilities across 28 States, creating
    half-a-million new jobs. These tribal casinos are currently
    generating nearly $27 billion in much-needed revenue, which is
    used to fund urgent tribal priorities such as housing, health
    care for our elders, and education for our youth.
        Our tribal coalition has been part of the success story of
    Indian gaming, individually running some of the largest tribal
    casinos in the United States. We have extensive experience in
    regulating gaming activities, protecting consumers, and
    exercising our sovereign rights as tribal nations, which gives
    us unique insight into the impacts of H.R. 2267 on tribal
    gaming.
        While the Mohegan Tribe and our coalition partners agree
    that your vision can work--regulating Internet gaming, if done
    properly--many are still forming their opinions, and we respect
    their rights as sovereigns to do so. The National Indian Gaming
    Association and United South and Eastern Tribes are currently
    undertaking a comprehensive study of those issues involved.
        However, I believe there is universal agreement among all
    Tribes that if Internet gaming were to be permitted, Indian
    Tribes must have the ability to participate on a level playing
    field with other gaming interests, and have tax parities with
    any State government that may choose to participate. And the
    gains that we have made as tribal nations under IGRA must not
    be endangered.
        After studying H.R. 2267 and applying our experience in
    running successful tribal gaming operations, it is our opinion
    that the bill can be further enhanced from its current form. I
    have provided written testimony, and I have gone into
    significant detail on those improvements, which I wish to
    highlight here.
        The most important improvement, from our perspective, is a
    provision that makes it clear that tribal governments and
    tribal gaming facilities should be clearly authorized to
    operate Internet gaming sites. The licensing standards should
    be modified to ensure application to a tribal government or its
    designated tribal agency or entity operating the site.
        The issue of limitations under the Indian Gaming Regulatory
    Act on acceptance of wagers by Tribes from persons not on
    reservation lands must be addressed to ensure that Tribes
    operating government gaming operations can accept Internet
    wagers from persons both on and off their reservation, as long
    as they are in a location that has not otherwise opted out.
    Otherwise, there would be no support for H.R. 2267 from the
    Tribes.
        We suggest you extend the exclusion from IGRA to Tribal
    State gaming compacts, pursuant to IGRA. As you are aware, IGRA
    requires that Tribes and States must enter into a compact for
    any type of class three gaming house bank games which are
    offered by the Tribe.
        A provision needs to be added that clarifies that all games
    offered would be exempt from IGRA under compacting provisions
    allowing Tribes to compete on a level playing field with non-
    tribal competitors, and pay the same Federal tax. Adding this
    measure would ensure that no conflicts would occur between
    States and Tribes under existing compacts.
        The tribal nations respectfully request meaningful
    consultation before this statute is enacted on how best to
    regulate Internet gaming. We are experts in this field, and we
    believe that we can provide you expertise in how best to
    regulate the games.
        We also urge further restrictions on certain overseas
    competitors. All Tribes and commercial casinos in the United
    States have strictly complied with current laws. We believe
    fairness dictates that H.R. 2267 be modified in regard to
    licensing of foreign operators to require some period of lawful
    operations under license by a reputable foreign government as a
    prerequisite for seeking licensure on the same footing as U.S.
    applicants.
        We support enhancements to the licensing and regulatory
    provisions, such as requiring that all Internet gaming
    facilities be licensed in the United States.
        Again, I appreciate the opportunity to testify today. The
    rest of my comments are included in my written testimony.
        [The prepared statement of Chairwoman Malerba can be found
    on page 48 of the appendix.]
        The Chairman. Next, Tom Malkasian, vice chairman and
    director of strategic planning for Commerce Casino.

       STATEMENT OF TOM MALKASIAN, VICE CHAIRMAN AND DIRECTOR OF
                  STRATEGIC PLANNING, COMMERCE CASINO

        Mr. Malkasian. Thank you. Good afternoon, Chairman Frank,
    Ranking Member Bachus, and members of the Financial Services
    Committee. It is a pleasure to be here today to offer my
    testimony on H.R. 2267. My name is Tom Malkasian, and I am an
    owner, a board member, and the director of strategic planning
    for the Commerce Casino, located in Los Angeles, California.
    The Commerce Casino is the world's largest poker casino, with
    over 243 licensed gaming tables, and over 2,600 employees.
        Our coalition of poker clubs and sovereign Indian nations
    in California support some legalization of Internet gaming. We
    believe limited forms of online poker can provide safe play for
    our patrons and tax revenues to the jurisdictions in which we
    operate, but only if the legislation is done the right way.
        Therefore, it is with regret that I must testify in strong
    opposition to H.R. 2267 as currently written, and urge members
    of the committee to vote against it, because the legislation is
    fundamentally flawed and unsound.
        H.R. 2267 and its companion bill, H.R. 4976 are based on
    false revenue assumptions that: would require the removal of
    the right of any State or Tribe to opt out of the bill in order
    to achieve the advertised tax revenues of $42 billion over 10
    years; contain no legal regulation, licensing, or controls on
    Internet gaming; override current State and tribal gaming laws;
    violate exclusive tribal gaming rights in many States; enshrine
    arbitrary and unfair tax inequities into law, including
    unprecedented direct Federal tax on Indian tribal governments;
    endanger the flow of commercial and tribal gaming revenue to
    local, State, and Federal Governments; and brazenly reward
    illegal foreign operators by locking in unprecedented market
    advantages that can undermine and destabilize the land-based
    American gaming industry.
        I am a numbers guy. I have learned that no matter how good
    the numbers sound when an idea is being promoted, if the
    details don't support the numbers, the plan won't work. This is
    the case in H.R. 2267.
        Supporters are misleading members to believe that a
    significant amount of tax revenue will be raised by the bill,
    when those revenue estimates are not based on language
    currently in the bill, and would require removal of the ability
    of States and Tribes to opt out.
        H.R. 2267 supporters cite the congressional Joint Committee
    on Taxation study that provides 3 scenarios that forecast tax
    revenues in the $10 billion to $14 billion range over 10 years,
    and a fourth scenario that projected $42 billion over a 10-year
    period. Even the lowest revenue estimate assumes that all
    Internet gaming facilities licensed under the bill would be
    required to be located in the United States. But that
    requirement does not exist in H.R. 2267. The highest revenue
    scenario of $42 billion also assumes no State or Tribe would be
    permitted to opt out.
        You can either have State opt-out provisions or you can
    hope to have $42 billion in Federal tax revenue, but you can't
    have both. To accomplish this, you must take away the right of
    each and every State and every one of the 564 Indian Tribes to
    opt out of Internet gaming, and require they must participate
    in the Federal system. The attorneys general of Maryland,
    Florida, Indiana, Colorado, and Virginia have already condemned
    this potential Federal takeover of their gaming laws.
        H.R. 2267 allows licensing for companies which have been
    taking bets illegally from U.S. residents for years, giving a
    ``get-out-of-jail-free card'' of sorts to criminals who will
    have a huge competitive advantage over the U.S. companies who
    followed the law.
        Let me illustrate how absurd this is. If Congress were to
    decide to legalize marijuana, certainly no one would suggest
    that permits be sold to sell marijuana to the drug cartels,
    since they have the most money and experience in marketing and
    distributing the product. Illegal foreign site operators should
    be deemed ineligible to ever be licensed or considered for a
    license.
        Let me turn now to a significant lack of regulatory
    oversight. Meaningful regulation requires that all gaming
    facilities be open 24 hours a day, 7 days a week, 365 days a
    year, and allow access to the investigators. In this bill,
    those sites don't have to be in the United States. Therefore,
    it would be impossible for them to regulate.
        Astonishingly, under H.R. 2267, 5 employees of the Internet
    gaming operation must be licensed. Vendors are not required to
    be licensed at all, leaving a huge loophole where operations
    could be penetrated by cheats and criminals. Every employee and
    most vendors of the Commerce Casino, no matter their position,
    must undergo background checks for licensing. H.R. 2267 has no
    requirements that all licensing certification, software, and
    games be protected.
        The rest of my testimony has been submitted. I thank you
    for the opportunity to be here today.
        [The prepared statement of Mr. Malkasian can be found on
    page 53 of the appendix.]
        The Chairman. Next, Mr. Ed Williams, who is president and
    chief executive officer of Discovery Federal Credit Union. And
    he is testifying on behalf of the Credit Union National
    Association, CUNA.

      STATEMENT OF EDWIN WILLIAMS, PRESIDENT AND CHIEF EXECUTIVE
       OFFICER, DISCOVERY FEDERAL CREDIT UNION, ON BEHALF OF THE
                CREDIT UNION NATIONAL ASSOCIATION (CUNA)

        Mr. Williams. Mr. Chairman, Ranking Member Bachus, and
    members of the Financial Services Committee, thank you very
    much for the opportunity to testify at today's hearing on
    behalf of the Credit Union National Association.
        My name is Ed Williams, and I am president and CEO of
    Discovery Federal Credit Union in Reading, Pennsylvania. With
    total assets of approximately $130 million, Discovery Federal
    Credit Union serves 10,500 members in the community of Berks
    County, Pennsylvania.
        I am also a member of CUNA's board of directors. CUNA, of
    course, does not condone any illegal activity. However, the
    Unlawful Internet Gambling Enforcement Act and its implementing
    regulations represent an inappropriate and unreasonable
    compliance burden which causes us great concern. In short, the
    law makes credit unions and other financial institutions liable
    if transactions with illegal Internet gambling providers are
    approved, but does not provide us with a definition of
    ``unlawful Internet gambling,'' much less lists of the illegal
    Internet gambling providers.
        Even if credit unions were not struggling to comply with an
    ever-increasing regulatory burden, which they are, it is
    unreasonable to assign the liability for policing Internet
    gambling activity to depository institutions, many of which are
    small, without giving them the means necessary to determine
    which transactions are illegal. Treasury and the Federal
    Reserve have concluded that they cannot track who these
    entities are, and leave this burden to the private sector.
        We are thankful that the regulatory regime promulgated by
    the Fed and Treasury did take steps toward reducing the burden
    that my credit union faces in complying with UIGEA. But it has
    not removed the liability that we or our service providers face
    if we are wrong. And we continue to be exposed to reputation
    risks if we block members' transactions that are legal, and
    ought to be approved.
        UIGEA rules put the onus on depository institutions serving
    non-consumer account holders, to ensure that those entities are
    not operating in violation of UIGEA. This generally involves
    asking the new non-consumer credit union members about Internet
    gambling during the account opening process and, when
    necessary, obtaining a certification from the member that they
    are not engaging in illegal Internet gambling activity.
        To ensure compliance with respect to blocking transactions,
    we rely on policies and procedures developed by the various
    payment card system operators. Transactions that receive a
    certain code are blocked from payment. At my credit union, the
    number of transactions that are blocked is no more than a
    handful per month. The process, unfortunately, catches some
    false positives: transactions which should not have been
    blocked, because they were not illegal Internet gambling
    transactions, notwithstanding the code assigned by the payment
    card network.
        We believe that part of the solution to the compliance
    problem credit unions face could be the enactment of
    legislation like H.R. 2267, which would require Internet
    gambling businesses to be licensed. By registering these
    businesses, the legislation provides safe harbor for financial
    institutions to make payments to these federally registered
    sites without any risk of violating UIGEA. H.R. 2267 promotes
    regulatory simplicity, while assisting financial institutions'
    compliance with UIGEA.
        Although H.R. 2267 is a step in the right direction, we
    would like to work with you, Mr. Chairman, to strengthen the
    bill's safe harbor provisions. Specifically, we ask Congress to
    direct the Departments of Treasury and Justice to develop and
    maintain a list of illegal Internet gambling providers and
    provide safe harbors to financial institutions which use both
    lists when determining whether a transaction should be blocked.
    The existence of both lists will make your bill stronger,
    because it will provide even more incentive for Internet
    gambling providers to register, and it will allow credit unions
    to be certain whether a transaction should be paid or blocked.
        Credit unions are already burdened with heavy policing
    mandates and limited resources. Our compliance responsibilities
    under BSA and OFAC rules are extraordinary.
        We do not think that UIGEA can be fairly implemented
    without creating a list similar to what OFAC publishes to tell
    financial institutions who are the bad guys. We know that the
    Treasury and the Fed gave significant consideration to the
    development and maintenance of a list of unlawful Internet
    gambling providers during the UIGEA rulemaking. They concluded
    that such a list would not be effective or efficient. However,
    if the Federal Government is unable to know which entities are
    illegal Internet gambling businesses, how in the world are
    depository institutions like mine expected to know?
        Mr. Chairman, your legislation takes a step in the right
    direction, and would add a degree of certainty to credit union
    compliance with UIGEA. We appreciate your tireless effort on
    this issue. Nevertheless, we continue to maintain that if the
    government decides certain gambling is illegal, and mandates
    that financial institutions police the illegal activity, the
    government should have the responsibility to produce a list of
    bad actors and provide safe harbors to depository institutions
    that use the list, including a provision mandating such a list
    would strengthen your legislation.
        Thank you very much for the opportunity to testify at
    today's hearing. I am pleased to answer any questions a member
    of the committee may have.
        [The prepared statement of Mr. Williams can be found on
    page 57 of the appendix.]
        The Chairman. I will now recognize myself. The gentleman
    from California, Mr. Baca, had an opening statement, and the
    timing was such he wasn't able to do it. So I will now yield 2
    minutes of my 5 minutes for an opening statement to the
    gentleman from California. That will not come out of his 5
    minutes, but out of mine.
        The gentleman from California is recognized for 2 minutes.
        Mr. Baca. Thank you very much, Mr. Chairman, and thank you,
    Mr. Ranking Member, for holding this hearing. And I want to
    thank the witnesses for being here, as well.
        This bill before us attempts to set up a Federal regulatory
    system of Internet gaming, where providers can obtain a
    license, accept wagers, and be taxed on the revenue.
        However, I believe the only thing that this bill will do is
    to create problems for California and our recovering economy.
    In fact, the bill, if passed as it stands, threatens to close
    22,000 jobs created in California casinos, jeopardize
    approximately $455 million the California State Government
    gains from gaming revenue, violates tribal sovereignty, and
    breaks compacts made with the States, growth, jobs, and revenue
    for offshore companies not here at home. It allows offshore
    companies to continue to operate in places where a strong
    regulatory presence is absent, almost impossible oversight.
        This violates tribal sovereignty. Instead of placing these
    economies in severe distress, economies that already are some
    of the poorest in our Nation, this bill also does nothing to
    protect the American jobs. Brick-and-mortar casinos are a
    constant source of American jobs. At a time when America needs
    jobs, we should be building these consistent sources, not
    trying to tear them down.
        In my home State of California, the unemployment is about
    12.3 percent. Providing assistance to offshore companies won't
    help. It will outsource jobs, and hurt over 22,000 people
    employed by California casinos.
        The safeguards put in place by this bill will do nothing to
    block fraud or prevent problem gaming. At a time when we just
    passed regulatory reform to increase accountability and
    oversight, we are now considering a bill that does little to
    ensure either of these things.
        The scope of gaming that is allowed under this bill will
    open up gaming to children. Problem gamblers will be able to
    have access to gaming on their laptops, iPhones, BlackBerrys,
    iPads, and other devices.
        I urge my colleagues to vote against this bill.
        The Chairman. I will take part of my remaining time to say
    this is an interesting coalition. We are seeing opposition to
    this bill consists partly of people who think gambling is
    terrible, and partly of people who think it's so wonderful that
    they don't want anybody to be able to compete with them in
    offering it. I think that is why Mr. Norquist and the Chamber
    of Commerce, believers in free enterprises--which I include
    myself--disagree with both aspects.
        Let me say one of the great mistakes is when people say,
    ``You're approving gambling.'' Look, the world ought to be
    divided into--in the United States, a free country--three
    categories: things that harm other people; things that are
    damaging; and things that are made illegal. Some things--a
    small number, which are really very helpful, and you try to
    encourage them--tax exemptions and other ways. And the great
    majority of human activity ought to be none of our business.
        The gentleman from Alabama said people will make unwise
    choices. Anybody who looks at the members of this body are
    going to think that at least half of the people made unwise
    choices. People made unwise choices, either for us or for them.
    Unwise choices are part of freedom.
        And so, this notion that--and the notion that it can lead
    to addiction, it is the death of freedom if you say that
    because some minority of adults will abuse something, you
    prohibit it. You would go after video games. There is a serious
    problem of video game addiction with college students. What we
    have is--the gentleman has that. But let me ask the gentleman--
    I would yield to the gentleman--some California Tribes going to
    be competing with that, or are they going to be okay? Because
    if the California Tribes are in the video game business, that
    might affect how the bill went through.
        Mr. Baca. If it impacts our children, then it won't--
        The Chairman. Children, yes. You can protect children. But
    this is not a protection of children. This is a ban on all
    activity. And that is not an effective way to protect children.
        People said, ``You're going to put this on the Internet.''
    You can buy a lot of things on the Internet that I assume you
    wouldn't want 8- and 9- and 12-year-olds to have. There is
    sexual material, there is alcohol, there are other things. This
    notion that you protect children--first of all, the poor
    children are a stalking horse here. The poor children here are
    being used by people who don't like gambling, and I don't
    understand this.
        In some cases, it's religious. Apparently, some people see
    in the Bible a prohibition against gambling, although there was
    apparently a footnote that exempts bingo. Some of my liberal
    friends don't like it because it's tacky. I have friends who
    are for letting people smoke marijuana and read whatever they
    want in terms of literature, and do other things that I
    certainly wouldn't want to do but wouldn't prohibit anybody
    else from doing, but they draw the line at gambling, I think,
    because it's like kind of a cultural problem. So, let's let
    people do what they want.
        Now, people will talk about the regulatory scheme. I would
    be for less regulation. I would be for letting people do what
    they want, but we do have these concerns raised. And we are
    prepared to make some of the changes that people have talked
    about, Ms. Malerba and others. But it fundamentally comes down
    to this: Do we stop adults from engaging in a particular
    activity, either at the request of competitors or at the
    request of busybodies? And I hope the answer will be ``no.''
        The gentleman from Alabama is now recognized.
        Mr. Bachus. Thank you, Mr. Chairman. Mr. Fagan, I would
    like to call your attention to an article that was published in
    the Vancouver Sun just yesterday, and submit the story for the
    record. The story says the solicitor general of that Canadian
    province we referred to, that they are now allowing Internet
    gambling in Canada, and he says he's concerned about the
    potential for organized crime to misuse online gambling after
    revelations that the BC Lotteries Corporation had been fined
    $670,000 by a Federal agency that tracks money laundering and
    terrorist financing.
        Now, that's a State-operated lottery, or a provincial-
    operated lottery in Canada. Do you have any comment on that
    article? He also says he's reviewing more than 1,000 violations
    by the online casino operations of the Federal proceeds of the
    Crime and Terrorist Financing Act. Particularly in light--Ms.
    Duke has told us that Canadian Web sites are highly regulated
    and safe, and that American online casinos, with proper
    technology, can be also.
        Mr. Fagan. Not having seen the particular article, I can't
    comment much about the article. But I do know that--and, again,
    I can't comment on material I know from grand jury information
    or from classified investigations--but I do know in North
    America, including Canada, there have been investigations that
    directly center on the misuse of Internet gambling sites for
    terrorist financing purposes, and that no amount of regulation
    will stop that. As I said in my testimony, the amount--limiting
    the number of avenues by which terrorists can move funds makes
    sense, from my point of view.
        And this so-called freedom argument in favor of allowing
    this kind of Internet gambling more freely, and the comparison
    of the present ban to, say, liquor prohibition, just doesn't
    hold up. In the 1920's era liquor prohibition, the government
    was then taking away something people already had, which was
    difficult to duplicate in quality on an individual basis. A
    prohibition of Internet gambling, however, takes nothing away
    from people which they previously legitimately had. The Wire
    Wager Act has prohibited this kind of telephone wire-based
    gambling for approximately 50 years, and it supplements even
    older State laws.
        Moreover, Internet gambling is not difficult to duplicate
    in quality on an individual basis, as there are plenty of
    outlets, formal and informal, for gambling. Ms. Duke can gamble
    in many places: in her home; in casinos; and in all sorts of
    places. She just can't do it on the Internet, so long as the
    Internet is--the gambling information crosses State lines or
    foreign--
        Mr. Bachus. All right, let me ask you this. I would also
    like to submit for the record, without objection, an MSNBC
    story that was published, actually 2 years ago, detailing
    crimes that UltimateBet.com had made. This dealt with a $75
    million fraud. And I know, Ms. Duke, you are affiliated with
    YouBet.com, is that correct?
        Ms. Duke. I am affiliated with UltimateBet.net, which is a
    free play site. But they do offer games--
        Mr. Bachus. Which is a--
        Ms. Duke. --on .com, yes.
        Mr. Bachus. Yes, on Ultimate--
        Ms. Duke. And it was $22 million. The site self-regulated
    and refunded all the money to its customers. I would prefer to
    have something like H.R. 2267 so that the government could
    oversee that regulation. I think that the customers of that
    site were lucky that they were playing on a site under a new
    management that behaved in an honest way and refunded them.
        Mr. Bachus. But--
        Ms. Duke. But the individual--and it was one individual--
    who perpetrated the crime and breached the software has not
    been prosecuted because, unfortunately, there is no
    jurisdiction to do so.
        Mr. Bachus. All right, let me say this. I think you're
    right, $22 billion is what it turned out--
        Ms. Duke. $22 million, not--
        Mr. Bachus. $22 million, I'm sorry. Now, the third--
        Ms. Duke. All of which was refunded.
        Mr. Bachus. The last thing I would like to say is there has
    been some testimony today that we have an organization, the
    Safe and Secure Internet Gambling Initiative, which will help
    ensure that offshore corporate interests operate these sites in
    a safe manner.
        We went to the headquarters of that institution, and here
    is the headquarters. It's a UPS drop box. And what State is
    that in? In Washington, D.C. So this is the institute that
    testimony has been is going to regulate--
        The Chairman. The gentleman's time has expired. The
    gentlewoman from California.
        Ms. Waters. Thank you very much, Mr. Chairman. I really
    have no questions for this panel. I came here today to listen
    and to learn and to welcome some of those here in the audience
    and on the panel from the Los Angeles area. And I am anxious to
    know more about the issues.
        So I will yield back the balance of my time. I yield back.
        The Chairman. The gentlewoman from Illinois.
        Mrs. Biggert. Thank you, Mr. Chairman.
        Ms. Duke, what is the definition of a poker player versus
    someone who is gaming?
        Ms. Duke. Poker is a game that is played between
    individuals, not against the house. It is a game of skill. It
    is been determined by that in pretty much every court decision.
    In fact, the reason why the Commerce Club exists is because
    California recognizes that card games, which are games of
    skill, are different than other types of gaming.
        So things like slot machines and those kinds of activities
    are handled by the Indian Tribes in California. But places like
    the Commerce Club can exist because poker is different.
        Mrs. Biggert. Do you think that there should be different
    regulations for that because of the difference in the
    definition?
        Ms. Duke. Games of skill are definitely treated differently
    legislatively. And in fact, the majority of the offshore sites
    that are offering poker in the United States right now have
    very strong legal opinions and lots of concurring opinions that
    they aren't actually breaking any laws because poker is a game
    of skill.
        That being said, I personally think that adults should be
    able to do what they want when it doesn't cause direct harm to
    anybody. So I personally think that everything should be okay.
    But poker is definitely a different kind of game because it
    doesn't go under games of chance. And most of the statutes for
    basically a predominance of skill as part of the determination
    of that.
        Mrs. Biggert. I have seen you all play out in Las Vegas,
    and it certainly attracts an awful lot of people. There are an
    awful lot of people who like the skill.
        Ms. Duke. There are a lot of fans, and the game is growing
    quite a bit. And it has been thriving even since the passage of
    UIGEA, which is one of the reasons why I think we need
    regulation, because it hasn't actually done anything to
    decrease the number of people engaging in this activity online.
        In fact, the year that UIGEA passed, the main event of the
    World Series of Poker had about 2,000 people in it, and this
    year, it had 7,300 people in it. It has grown tremendously
    despite the fact that legislation had passed.
        So I think we need to regulate it and recognize that this
    is something that Americans want to engage in, and it is a game
    of skill.
        Mr. Bachus. Would the gentlelady yield for just a comment?
        Mrs. Biggert. Yes.
        Mr. Bachus. The reason that it hasn't done any good is
    because it was only implemented this last month, June, June of
    2010, because the Internet gambling industry stalled it off for
    2 years. And it won't do any good until we stop the payment of
    money. And that is why the chairman has offered his bill to
    stop our efforts.
        Mrs. Biggert. Reclaiming my time, when you are competing at
    a table, do you play all over the world? You are in different
    areas, so--
        Ms. Duke. Yes.
        Mrs. Biggert. Are you able to determine if any players were
    communicating or working together? Are there people who really
    try and defraud others at this game of skill?
        Ms. Duke. Are you talking about in brick-and-mortar or on
    the Internet?
        Mrs. Biggert. No. I am talking about the brick-and-mortar.
        Ms. Duke. In the brick-and-mortar, it is extremely
    difficult and there is no recourse if you do suspect it because
    they have no way to mine the data, to look at what the
    transactions at that table were. So even if they did suspect
    that people were colluding, they wouldn't be able to do
    anything about it.
        That is actually a place where playing on the Internet is
    safer because it is much easier to spot collusion because they
    can mine all of the data transactions. So any hand that you
    have played with any individual, they can look at--when you
    suspect an individual, they can look at every single hand that
    person has played and look at who they tend to play with and
    those kinds of things, and then they can actually look and see
    exactly how much money every individual on the site lost to
    that individual or the consortium.
        So, I know in the past, from playing for 15 years, that
    there have definitely been cases of cheaters being caught in
    casinos, and I have never seen a penny refunded to the players
    who were affected; whereas online, in every single case that I
    know of, every single penny has been refunded because they can
    refund it.
        Mrs. Biggert. Do these sites check every game all the time?
    Is this something that is continuous?
        Ms. Duke. Yes. They have software in place that basically
    looks at the distributions. And this is in fact something that
    Ultimate Bet has implemented. So they are looking at the
    distributions of win/loss rates in the players.
        They are also always checking the random number generation
    to see that the correct distribution of hands being dealt is
    right for what random number generation would be so that they
    can flag any time that something is too many standard
    deviations away from the mean to do an investigation. And they
    have different levels of alerts.
        So these sites are actually in some ways more secure than
    playing in a brick-and-mortar casino.
        Mrs. Biggert. Do you know how many people that takes, to
    look at that?
        Ms. Duke. A huge security department, and it is a big one.
    But a lot of it is handled by software.
        The Chairman. Time has expired.
        The gentleman from California, Mr. Sherman.
        Mr. Sherman. Mr. Sherman from California. Yes.
        The Chairman. I didn't say the Tribes from California. I
    said the gentleman.
        Mr. Sherman. Yes. Mr. Malkasian has said that you believe
    that those who have been acting illegally should be prevented
    from getting licensed under this bill. Do you think we can have
    faith in those who have been operating illegally to pay their
    taxes and keep minors off the site, if they have had this
    history of violating U.S. law up until now?
        Mr. Malkasian. Absolutely not. I don't believe that they
    will follow the law. Why would they?
        Mr. Sherman. That was known as an easy question. Yes.
        It has been suggested that perhaps we limit licenses to
    those entities that provide a majority of their jobs to people
    here in the United States and our U.S. entities. I don't know
    if any of the witnesses, and I am looking here, has looked at
    this from a WTO standpoint. Can we limit those who are licensed
    to those who are providing most of their jobs here? I will have
    to research that one myself.
        Now, Mr. Malkasian, you have said that you could support
    Internet gaming, presumably, if it was limited to U.S.-based
    entities that have, of course, not violated U.S. law in the
    past. What other requirements would you want to see in the
    bill?
        Mr. Malkasian. One moment, please.
        If done properly, with the proper safeguards, which
    include: real regulation in the law stating the requirement
    that all operations be located in the United States;
    permanently barring all illegal site operators, overseas site
    operators, or local operators from ever being licensed;
    creating stiff penalties for individuals gaming on unlicensed
    sites and their operators; respecting States' rights; and
    changing the State opt-out to an opt-in provision that allows a
    vote of the legislature rather than a decision by the governor.
        Mr. Sherman. Let me now go to Mr. Fagan. Do we have the
    technological capacity--will the sites have the technological
    capacity, is it reasonable for us to expect them to have the
    capacity, to be able to keep minors off and to not allow people
    to play if they happen to be sitting in a State that has opted
    out?
        Mr. Fagan. The short answer is ``no.'' While we have
    technological abilities to attempt--
        Mr. Sherman. Can you speak into the microphone, please?
        Mr. Fagan. And turn it on. Yes. The short answer is no.
    While we have the technological ability to attempt to do those
    things, there are work-arounds for virtually any kind of filter
    that exists, and particularly young people are extremely adept
    at getting around limitations on age, identity, and geographic
    limitations.
        So I have no confidence that the filtering technology that
    exists now will--
        Mr. Sherman. From an anti-terrorism/money laundering
    perspective, would we be in better shape if all of this
    Internet gambling was by U.S.-based entities with the money
    remitted to a U.S. source and a U.S. company?
        Mr. Fagan. If you could limit it that way, you might be in
    better shape. But we can't limit it that way, as I said. I
    think the amount of--
        Mr. Sherman. You could say we could use all of the
    capacities of the Federal Government to block Internet gaming
    except on sites located here in the United States and subject
    to physical eyeball-to-eyeball regulation.
        Mr. Fagan. The trouble is, we haven't attempted to enforce
    UIGEA, for example, since it has been delayed. And we have
    only--and then even before UIGEA, we had tools that could fight
    offshore Internet gambling, but the Department of Justice and
    the States' attorneys general never attempted a coordinated,
    coherent attack on those problems.
        Consequently, when we first started looking at the problem
    in the Eastern District of Missouri, where I was a prosecutor,
    a Federal prosecutor, in 1996, because Western Union had its
    operations center there and huge amounts of money were
    identified as moving through there, we tried to get help from
    Washington--
        Mr. Sherman. Interrupting briefly, you just seem to be a
    pessimist on our ability to control this, whether we change the
    statute or we don't.
        Mr. Fagan. No, I am not a pessimist. I am saying we have
    not tried sufficiently, using the tools we have, particularly
    UIGEA, which is a wonderful tool, but it has been delayed. So
    if we give some resources or some impetus to a coalition or a
    task force approach to this, I am confident we can control this
    problem.
        The Chairman. Time has expired.
        The gentleman from California, Mr. Campbell.
        Mr. Campbell. Thank you, Mr. Chairman.
        Mr. Williams, since you are at the sharp end of the
    enforcement of this under existing law, is it fair to summarize
    your testimony by saying that the enforcement of the existing
    law is cumbersome at best and unenforceable at worst?
        Mr. Williams. I think that characterizes it very well,
    Congressman. Our problem with this is that we are trying to
    block any illegal Internet gambling charges that come through
    to our credit union. The problem we have is we have never been
    given the resources or a list to compare that against.
        Mr. Campbell. So from the standpoint of the financial
    services industry, who has to participate--that is what this
    committee is here about--we need to change the existing law?
        Mr. Williams. Correct. We feel that if the licensing did
    accomplish--or did take place, that at least we could start
    from a list that we can compare transactions against and
    approve those transactions based upon these are approved by the
    licensing requirements.
        Mr. Campbell. Thank you. Ms. Duke, how many people play
    poker or watch the World Series of--what is the universe in the
    United States of poker players?
        Ms. Duke. The estimate is that 70 million people are
    playing.
        Mr. Campbell. ``Seven zero million?''
        Ms. Duke. Correct. And the industry is growing; it is not
    going to go away. And I don't think that we should just hide
    our heads in the sand. UIGEA does nothing whatsoever to protect
    consumers. It doesn't do anything to keep minors offline. It is
    a banking law.
        Mr. Campbell. And we are talking about more things than
    poker. But 70 million Americans already do this and want to
    play--
        Ms. Duke. Seventy million Americans--
        Mr. Campbell. --and want to have the option to play with
    their friends online.
        Ms. Duke. Exactly. And I know, as a mother, I would like
    good government policy to support my wanting to keep my
    children offline, just as I expect that when they go to a
    liquor store, they will be carded, as an example, which is a
    government policy. And UIGEA does nothing for that. It is
    simply a banking law. It doesn't do anything to protect
    consumers or minors.
        Mr. Campbell. And when you talk about that number of
    people, in terms of economic growth, if we can create a legal--
        Ms. Duke. Yes.
        Mr. Campbell. --controlled, regulated structure for this in
    the United States, as Ms. Malerba and Mr. Malkasian can attest,
    this can be a pretty good business that could employ a lot of
    people.
        Ms. Duke. Yes. And actually, it will just build on top of
    what there already is. There was a study done by the Innovation
    Group that was actually commissioned by the Commerce Casino
    that shows that Internet gaming does not stop people from going
    to their local casinos, that it actually doesn't change that
    behavior whatsoever.
        Mr. Campbell. Right. In the same way movies didn't stop
    plays.
        Ms. Duke. Correct.
        Mr. Campbell. And records didn't stop concerts because of
    the experience that some people like--
        Ms. Duke. Correct. And I think that the World Series of
    Poker is a great example of that. Before Internet gaming, the
    main event of the World Series of Poker--so this was in 2000--
    had about 600 people entering, in the year 2000.
        Mr. Campbell. Right.
        Ms. Duke. In the year 2010, which is when this growth
    online has occurred, there are now 7,300 people playing the
    main event, which creates a huge number of jobs.
        Mr. Campbell. Okay. Let me cut you off just so I can get--
    Ms. Malerba, I heard you say that if we could--and I want you
    to know, from somebody who is involved in this bill, that I
    would be committed--that if tribal casinos could participate on
    an equal basis with others, then this is something that you
    guys can support. Is that correct?
        Ms. Malerba. We would definitely support that. We do
    believe that there are certain aspects of the regulation that
    would need to certainly be changed.
        Mr. Campbell. Right.
        Ms. Malerba. But we want to work with the committee to
    change the bill.
        Mr. Campbell. Right.
        Ms. Malerba. And I think you have to go to online shopping.
    All right? So I shop online at Ann Taylor, and I shop in Ann
    Taylor's stores, and I do both equally.
        Mr. Campbell. Right.
        Ms. Malerba. And the places that have embraced online
    commerce have actually grown their business. So we can hide our
    heads in the sand or we can embrace the industry. It is
    happening. I believe that it can be regulated very, very
    tightly. And there is much more regulation.
        When somebody is gambling at a bricks-and-mortar casino,
    you don't know--you can't trace every transaction the way you
    can online because you have a document online that will trace
    every transaction.
        You know if someone's gambling habits have changed. There
    is a way to prevent underage gambling. And certainly, there is
    a way to prevent it at a bricks-and-mortar casino. What if the
    dealer says, ``They look like they are 21. I guess I am going
    to let them.''
        Mr. Campbell. Right.
        Ms. Malerba. So you cannot regulate your way to good
    practices. The way--you can regulate, and you need to have
    strict enforcement of that regulation. But certainly, we
    embrace the fact that the Internet is here to say. And why
    wouldn't you want some worldwide funds coming into the United
    States? I do.
        Mr. Campbell. Thank you, Ms. Malerba.
        Just finally, for Mr. Malkasian, I heard your list of
    things. I don't know about all of those. But if a bunch of
    those are in this bill, can you support it?
        Mr. Malkasian. I would have to go back to the coalition and
    discuss it with them, personally. I feel that with the proper
    regulation, online gaming, limited to poker, makes sense.
        Mr. Campbell. Limited to poker? Who said anything about
    that?
        Mr. Malkasian. I understand. That is my position. And I
    would just like to ask--if I may; I know it is not fair--the
    Innovation Group study that I commissioned, we commissioned at
    the Commerce Casino, didn't include any study or comments about
    how many employees would be won or lost in bricks-and-mortar
    casinos.
        The Chairman. Let me just say now we are going to go vote.
    Are there any members who want to ask questions who have not
    had--
        [show of hands]
        The Chairman. All right. I have to go to the Rules
    Committee. I will ask Mr. Moore to come back and preside; we
    will be gone for about 15 or 20 minutes. And any other members
    who want to ask questions, come back. There will be just one
    more round.
        So I would ask the witnesses to please stay. We will see if
    we can get you a deck of cards to keep you busy while you are
    here. But no money.
        Ms. Duke. I am all for that.
        The Chairman. No money. Oh, no. You can't play. No pros.
        Ms. Duke. Bring a computer.
        The Chairman. And we will come back, Mr. Moore, and--
        Mr. Bachus. Mr. Chairman, can we tell the witnesses that we
    won't reconvene till at least 4:00, I think? Would that be
    safe, so that they can--
        The Chairman. They will just have to gamble on that.
        [laughter]
        [recess]
        Mr. Moore of Kansas. [presiding] The hearing will come to
    order. The Chair will next recognize himself for 5 minutes.
        Last December, one of the witnesses testifying on this
    issue said, ``After more than a decade analyzing the risks
    posed by unregulated Internet gambling, it may be ironic, but I
    have reached the conclusion that the best way to protect
    families and consumers in connection with cyber-gambling is by
    legalizing it, not outlawing it entirely.''
        As a district attorney for 12 years, I know that protecting
    people, essentially children, is a top priority for law
    enforcement officers. And it seems that Internet gambling,
    given the widespread use of technology and the Internet today,
    will happen whether we like it or not.
        I am not a gambler. Personally, I don't care about gambling
    at all. But I recognize there are many responsible adults who
    do. And if we are able to drive this activity into the sunlight
    through a license regime, as the bill drafted by the chairman
    will do, we will be able to better track and regulate and
    prevent any fraudulent activity or scams.
        Ms. Duke, do you share this view, or do you have different
    ideas?
        Ms. Duke. Yes. The quote that you are referring to is from
    Parry Aftab, and she definitely believes this. One of the
    budget issues that I have with UIGEA is that it actually
    doesn't provide any protection for minors or protection for the
    consumers at all. As I said, it is strictly a banking
    regulation that governs the banks.
        So I would like to see more regulation, forcing these
    online operators to use majority verification software. Now,
    most of the reputable operators do do that, and they are
    licensed by friends of this nation like the U.K. and France
    that do enforce them having majority verification software. But
    I would like to see my own government supporting my policies,
    as a mother, and giving me protections to know that my children
    won't be gambling online.
        Mr. Moore of Kansas. Thank you.
        Mr. Williams, thank you for your testimony. I have heard
    from credit unions and community banks back in Kansas who share
    your view that their burdens to comply with the current
    Internet gambling law are excessive and unnecessary. And this
    comes at a time when credit unions are already trying to make
    loans to consumers and small business owners who need financing
    in order to grow and compete during these tough economic times.
        Compliance with the current Internet gambling law appears
    to be getting in the way of that effort. On page 3 of your
    testimony, you say, ``We believe that part of the solution to
    the compliance problem credit unions face could be enactment of
    legislation like H.R. 2267.''
        Could you give us an example, Mr. Williams, either at your
    own credit union or stories you may have heard from other
    credit unions, of how the current Internet gambling law is
    problematic in your day-to-day operations during these tough
    times? And then discuss how H.R. 2267 might help.
        Mr. Williams. Congressman, what we see currently in my
    credit union specifically--
        Mr. Moore of Kansas. Could you pull your microphone a
    little closer, sir, please?
        Mr. Williams. I am sorry.
        Mr. Moore of Kansas. That is all right.
        Mr. Williams. What I see currently in my credit union--I
    can't really address other credit unions in our area
    specifically--we have a handful of transactions that come
    through our ACH in a daily basis. What we have tended to do is
    block all those transactions because we don't have an idea of
    what is considered legal or illegal under the law.
        We chose to block all transactions at that point in time,
    and then from the compliance standpoint, we take an additional
    step by contacting every one of our members via mail to let
    them know why we block those transactions, in complying with
    the current regulation.
        We feel that the enactment of H.R. 2267 could lead us to
    developing, or could lead the Justice Department and Treasury,
    hopefully, to developing a list of either legal entities or
    illegal entities which then, on the order of an OFAC scan, we
    can look at on a daily basis and compare whatever transactions
    are coming through online against that list that we have from
    Treasury or from the government, and therefore either allow
    those transactions, if they are legal, or stop those
    transactions if they are illegal.
        Mr. Moore of Kansas. Thank you. The Chair is finished with
    my questions, and I will recognize Mr. Baca for 5 minutes, sir,
    if you have questions.
        Mr. Baca. Yes. Thank you very much, Mr. Chairman. And as I
    stated before, I am against this bill for a combination of
    different reasons. One is it opens up Internet gaming, and then
    the other, the impact it has on the State of California and the
    amount of jobs that could be lost in the State as well.
        My question is for Mr. Fagan. I want to discuss the
    interaction between H.R. 2267 and the Johnson Act. It is my
    understanding that the Johnson Act prohibits the use of gaming
    devices on Federal land, including Indian reservations. IGRA,
    however, provides an exception to this law. So long as the
    devices take place on Indian land, I say, take place on Indian
    land.
        Such activities is conducted under the Tribal-State
    Compact, under the Tribal-State Compact, approved by the
    Secretary of the Interior. Because of this, I have two
    questions.
        First, would authorization for use of the Internet for
    gaming proposed turn the computers into the Johnson Act device?
        Second, absent the inclusion of the amendment, would it
    appear that Tribes would remain subject to the restriction
    under both IGRA and the Johnson Act and would be unable to take
    advantage of this law? Is that correct?
        Mr. Fagan. The second question, I don't have an answer for
    you. The first question, I believe if not the PC, the computer
    itself, the software itself would be subject to that, the
    Johnson Act, because the software is basically a mechanical
    gambling device. It moves electrons the same way that a
    gambling device, a slot machine, had wheels that rotated. So
    yes, that would be the answer.
        Mr. Baca. Okay. Then Ms. Malerba, as you know, tribal
    government and their gaming operations cannot be taxed. Yet tax
    companion bill H.R. 2267 has a provision for a 2 percent tax--I
    want you to know, a 2 percent tax--to be paid by the operators.
    In the case of tribal government, this would be the first
    direct tax on Tribes. State that, on Tribes, the first step.
        If the tax is imposed, how long is it until someone says
    that all tribal gaming should be federally taxed, to the point
    to the fact is that Internet gaming is already taxed. So all
    Tribe gaming, should they be taxed, then?
        Ms. Malerba. There are a couple of things. I would say,
    first of all, I have already recommended that H.R. 2267 be
    exempted from IGRA so that Tribes will not violate their tribal
    compacts.
        In terms of taxing, I think that to say that Tribes are not
    taxed is a fallacy. We all have Tribal-State compacts. We all
    contribute to the State. We all contribute income to our
    States. As a matter of fact, we provide 25 percent of our slot
    revenues to the State of Connecticut. I would love a 2 percent
    tax on my slots.
        So I don't see that as any different, whether it is a
    Tribal-State compact or paying a Federal tax.
        Mr. Baca. Would you love it if it means that sovereignty is
    taken away from you and that you lose sovereignty, and all of a
    sudden--
        Ms. Malerba. I am saying, and what I have said--
        Mr. Baca. No, would you like it that all of a sudden
    sovereignty is taken away, and now you are taxed, and you no
    longer have the rights on tribal land that you have and the
    privilege that you have at this point; and that you will be
    taxed and you will have to be governed, which means then that
    you will be playing in the same level playing field as everyone
    else, which means no rights, no government, no council?
        Ms. Malerba. I think you are using a very, very broad
    interpretation of that.
        Mr. Baca. It is not broad. It is simple.
        Ms. Malerba. To do Internet gaming would be to say that we
    are exercising our sovereign right to participate. You don't
    have to participate as a Tribe.
        Mr. Baca. But once you begin to be taxed and you
    participate, that is where the problem lies. You are now being
    taxed on tribal land.
        Ms. Malerba. You are exercising your sovereignty.
        Mr. Baca. Which means automatically, then, that you will be
    open. You will be open to doing away with sovereignty at one
    point or another, somewhere along the lines, where everyone
    says, wait a minute. It is no different than a card club, any
    other casino, any other place.
        Ms. Malerba. So again, I would say you are exercising your
    sovereignty. And secondly, I understand that California wants
    to provide for Internet gaming only in California. So does that
    mean that they won't be providing any taxes to the State of
    California?
        Mr. Baca. But in California, it is governed, and they are
    done through a compact and an agreement that they have, and
    there are revenues that are paid into the State of California.
    Here, revenues, we don't where they are going to go. We know
    they are going to be outsourced. They are going to be outside
    of the State. So we are also going to lose jobs, too, as well.
        And this is about jobs. This is about jobs that we have. We
    are now losing so many jobs that have been outsourced out of
    this country. We need more jobs to be created right here. What
    this does is open an opportunity to outsource more jobs out of
    this area, and we should have them right here because what
    happens right now, those jobs are created right here.
        Many people have an opportunity to put food on the table,
    and take care of their families. The procurement, the
    contracts, the philanthropy that many of these end up doing in
    our areas would be lost because they wouldn't have the revenue
    that they are gaining right now.
        Mr. Moore of Kansas. The gentleman's time has expired.
        Ms. Malerba. Do I have time to comment on that?
        Mr. Moore of Kansas. Very quickly, please.
        Ms. Malerba. I would say that in Connecticut, we have 8,000
    jobs. We do not believe that participating in Internet gaming
    is going to endanger those jobs in any way. If anything, it
    will protect our--
        Mr. Baca. But I disagree with her.
        Ms. Malerba. --it will protect our employees.
        And in terms of sovereignty, participating in Internet
    gaming is not going to affect our reservation and our sovereign
    rights.
        Mr. Moore of Kansas. Thank you.
        Mr. Baca. I think you had better go back and read that. I
    think it will.
        Mr. Moore of Kansas. The Chair next recognizes Ranking
    Member Bachus for 5 minutes of questions, if you have any, sir.
        Mr. Bachus. Mr. Fagan, you were a Federal prosecutor in
    Kansas City? Is that right?
        Mr. Fagan. St. Louis.
        Mr. Bachus. St. Louis? Okay. I am sorry. You have offered
    testimony that you believe Internet casino operators will
    engage in predatory behavior.
        Mr. Fagan. Yes.
        Mr. Bachus. Would you elaborate on that?
        Mr. Fagan. The example of--everyone seems to be concerned
    about youth.
        Mr. Moore of Kansas. Would you pull the microphone closer,
    sir?
        Mr. Fagan. Thank you. Everyone seems to be concerned about
    youth and young people gambling. The Internet operators in my
    experience--again, practical experience, I am talking about--
    they don't care that young people are gambling. They will take
    money from anybody.
        But it is not just youth who will be put at risk should
    this bill pass. It is also persons who are alcoholics, sitting
    at home alone, drinking, gambling, and the person on the other
    end operating the Internet casino can't tell if that person is
    too drunk or not. A land-based casino operator can look at a
    guy and say, gee, you are in too deep. It is time to stop. But
    a person running an Internet casino can't tell that.
        Likewise, the person operating the Internet casino game
    cannot tell if that person who is gambling on the other end is
    a drug user and has gotten high and is gambling away his
    fortune; if that person is mentally ill or not; if that person
    is developmentally disabled. How do we stop the developmentally
    disabled from losing their money, which is often government
    support money, through gambling?
        The people could just be depressed. They could be
    despondent. And there is no way for an Internet casino operator
    to tell that about the people they are dealing with; whereas a
    bricks-and-mortar casino person can tell, and the responsible
    operators--which are most people in the commercial land-based
    casino industry--can tell, and they will stop people who are
    abusing themselves in some way and losing their money.
        Mr. Bachus. All right. Let me ask you this--
        Mr. Campbell. Will the gentleman yield, or are you going to
    use your whole--
        Mr. Bachus. No. I am going to use my whole time.
        Mr. Campbell. All right.
        Mr. Bachus. Is there technology which can identify youth
    and whether someone is a minor?
        Mr. Fagan. The technology can't identify youth. It can ask
    for youth to report itself and identify itself and claim that
    they are adults or not, and even--and then they can ask people,
    to somehow verify that. Send in your Social Security number or
    send me a copy of your birth certificate or something like
    that.
        But anybody who has grown up in America, at some point
    knows somebody who got phony IDs and went out and bought liquor
    when they were too young to buy liquor. And the same thing will
    happen on the Internet. People will steal identities. They will
    pay people to use their identities. They will adopt other
    peoples' identities as favors. Irresponsible adults will allow
    youth to adopt identities.
        And so there are plenty of ways that young people who want
    to gamble will get around this. And unfortunately, young people
    who are inexperienced are attracted by the lure of gambling.
        Moreover, the young people are attuned to games. Presently,
    they play video and computer games for points, and they are
    used to winning points. Any parent who has seen their child get
    that glassy stare as they play World of Warcraft or Pac-Man or
    whatever it might be is concerned and upset by that because the
    child seemingly is addicted.
        Add the lure of money, the promise of winning money to
    that, and in truth, the odds will be against them, they will
    lose money, and it is extremely likely that this kind of abuse
    and overreaching by Internet gambling operators will occur.
        Mr. Bachus. All right. I guess we call you Chief Malerba.
    Would you consider it, if this law allows companies like Poker
    Stars and what is it, Bodog.com, that have taken bets illegally
    in the United States today, were to get a license to provide
    Internet gambling services, would you feel that was a level
    playing field? Or are you for an exclusion for any company, or
    the principles of a company, who have engaged in illegal
    Internet gambling activity?
        Ms. Malerba. I think that all sites should be located in
    the United States. I think all Tribes should be operated by
    operators in the United States.
        In terms of what has happened in the past with the Internet
    gaming operators, I am sure that there are Internet gaming
    operators offshore that are very legitimate and have been
    licensed by other very legitimate governments. How that plays
    out in this bill, I think, is something for the committee to
    discuss.
        If somebody was licensed by a legitimate foreign country,
    does that exclude them from then applying for a license here?
        Mr. Bachus. That is what--my question to you is, your
    Tribe, have they taken a position on whether there should be an
    explicit ban on licenses for any companies that have operated
    illegally?
        Ms. Malerba. I think our Tribe is looking at what our
    options are. Should we be an operator ourselves? Should we
    partner with someone? Is there a domestic partner that we
    should partner with? Should there be a tribal coalition?
        So I would say at this point in time, we don't have a
    particular stance on what that should be.
        Mr. Moore of Kansas. The gentleman's time has expired.
        The Chair next recognizes Mr. Peters for 5 minutes.
        Mr. Peters. Thank you, Mr. Chairman.
        Prior to being in Congress, a few years prior to being in
    Congress, I served as a State lottery commissioner, and ran the
    Michigan State lottery, so I have experience in gaming
    operations. I understand the benefits that a legal, regulated
    gaming operation can have. I also understand that there are
    significant challenges in running a legal gaming operation,
    particularly the responsibilities that gaming providers have to
    not only their players, but also society at large.
        And so I am also concerned about the impact that this may
    have, particularly with younger players, as was mentioned. Mr.
    Fagan mentioned some of the challenges with younger players.
        Ms. Duke, I know that this is an issue that your
    organization has talked about as well. And just maybe if you
    could give me some sense as to what prevents minors now from
    going online and gaming, and why do you--do you believe that
    there are some protections? Do you share some of Mr. Fagan's
    concerns? Or do you think there is a way that we can work
    additional protections, perhaps?
        Ms. Duke. First of all, I think that the primary source of
    preventing minors from going online should be the parents, just
    as that should be the primary source of preventing minors from
    drinking as well. But I would also like there to be good
    government policy that supports the policies that I try to
    enforce in my home.
        Luckily, there is extremely sophisticated majority
    verification software available, and this is for any industry,
    not just online gaming, and many of the online gaming operators
    are already using this since they are, again, licensed by
    reputable countries like the U.K.
        Basically, what that majority verification software does is
    it just makes it very difficult for a minor to get online
    because they have to verify their identity against public
    records. So this is more than just they have to send in a
    heating bill. They have to do that, too. They have to prove
    where they live. They have to send in identification. But then
    this software checks what they are saying against public
    records, which are online.
        So this is very sophisticated, many levels deep, to make
    sure that this is who you are. It is identity verification. The
    government uses software like this as well, by the way. So we
    have to trust that we use best practices, and we use the most
    sophisticated software to prevent this.
        And this software is extremely sophisticated, and actually
    much more accurate than somebody looking at somebody's ID
    because there are very good forged IDs, and those are much
    easier to come by than being able to fool mjry verification
    software.
        Mr. Peters. I do believe there are some additional
    protections that we should be using. In addition to that, are
    there ways that we can improve some of the legislation that is
    being proposed here that perhaps has not been considered by the
    committee?
        Ms. Duke. I think that any amendment that further promotes
    consumer protection and keeping minors offline I am completely
    all for, even to the point of Mr. Williams having a list of
    businesses that are okay and businesses that you can accept
    transactions from. I think that anything like that can be added
    to the bill I certainly would be all for because I think
    revenue is a bonus.
        But the reason why we should really be concerned about this
    is because UIGEA doesn't provide any consumer protection
    whatsoever. And I would like to see a bill like H.R. 2267 come
    in that does provide consumer protection. The more we can do to
    bolster that protection, I am all for it.
        Mr. Peters. So by regulating the Internet gaming, we get
    additional protection, in your mind?
        Ms. Duke. Correct, because again, UIGEA is a banking law.
    This doesn't protect consumers. It doesn't protect minors. It
    doesn't--it is not a law that keeps minors offline. It is not a
    law that keeps problem gamblers offline. It is 1 percent of the
    population, but we would still like to keep them offline.
        We need--people are gambling online, and they are gambling
    online in record numbers. So given that these companies are
    growing, they are licensed by other countries that are
    perfectly fine with it and have very good licensing and
    regulation systems in place, their legal opinion is that
    certainly in the case of poker, offering poker to North
    Americans is legal as well.
        We know that this is happening. As a government, we should
    be protecting our consumers who are engaging in this activity.
    And the activity is not going away. So I would prefer to see
    very strong consumer protection in this bill.
        Mr. Peters. Mr. Chairman, I think my time has expired. I
    yield back.
        Mr. Moore of Kansas. I thank the gentleman. And the Chair
    next recognizes, for the last 5 minutes, Mr. Campbell.
        Mr. Campbell. Thank you, Mr. Chairman. And I just wanted to
    add some bits of information to some of what was recently said
    here.
        Mr. Fagan, to a couple of your points, to the issue of the
    person who is, let's say, temporary incapacitated, using
    alcohol or something like that, there are technologies out
    there which engage in a series of questions to try and
    determine if the person is of mental capacity or not.
        Those technologies are not, to be frank, fully developed
    yet to where we know they are foolproof. However, I will have
    an amendment that will be offered to this bill when it is
    marked up, presumably next week, which includes that we are
    going to study those with the idea that when those technologies
    become available, we can implement those.
        There are technologies available now that were not
    available 2 years ago, 3 years ago, or 4 years ago, that now
    are available that we can utilize for various consumer
    protections in this bill.
        You talked about problem gamblers. I think Ms. Duke made a
    good point that do we keep 70 million people from doing what
    they can because one person or less than 1 percent or \1/10\ of
    1 percent have a problem? No. We try and deal with that element
    that has a problem.
        And let me tell you, one of the things that will be in the
    amendment that I will propose to the bill is a loss limit on a
    per hour, per day, that sort of thing, basis. Now, most bricks-
    and-mortar casinos do not have such a thing.
        So therefore, we will actually be adding an additional
    protection for the online gambler that the bricks-and-mortar
    casino gambler will not have because we can, because it is very
    practical to do that sort of thing.
        You talked about checking people for their age, and you
    mentioned that people have fake IDs. And yes, Mr. Fagan, this
    may come as a great shock to you, but around college campuses,
    there are people under 21 years of age who buy alcohol and
    consume it. I have heard that this actually occurs.
        So the point is, nothing we do is foolproof. It is not
    foolproof in a bricks-and-mortar casino. It is not foolproof in
    a liquor store. And it is not going to be foolproof online. But
    there are technologies--alcohol is sold online today, widely,
    and there are technologies available that keep minors, to the
    best extent we can, from buying that alcohol online. And we can
    employ those technologies.
        And finally--well, not finally; I have one more comment--
    but relative to licensing, I was a car dealer before I lost my
    mind and went into politics. And you have to get a license to
    sell cars in California, and if you have done--virtually
    committed almost any crime out there, you can't get a license
    to go sell a car. I am not even talking about being the dealer.
    I am talking about selling a car.
        So it is routinely employed in States that there are
    certain background checks that you have to have to have a
    license. And this should be no different. And so we should have
    background checks and ensure who is there and who is--just as
    you and your casinos, that some of people who run the tables or
    whatever have to have background checks. We can have the same
    sorts of things, and it doesn't need to be any different. And
    this is not some great technological barrier that we can't
    cross.
        The point is that there are--the Internet moves very fast.
    And there are lots of protections and lots of things that are
    available out there today that were not available 5 years ago.
    And you know what? A year or two or three from now, there will
    be more that aren't available today.
        And to Mr. Baca's comment, my colleague from California,
    referring to the loss of jobs in California, there are a number
    of things we do pretty well in California, and one of them is
    the Internet.
        I don't think there is a whole lot of argument from my
    colleagues here, all of whom have fine States that do things,
    but that we kind of do more Internet stuff in California than
    any other State. And that is one of the things we haven't lost
    yet to Texas and a few other places, due to taxes and whatnot,
    but that is a different argument.
        But the point is, when I look at my home State of
    California--and I think this is true everywhere--if we can't in
    California be a major part of developing some of these
    technologies, developing some of these sites for people,
    putting this stuff together, and creating a ton of jobs, not
    just in the industry but in the support mechanism that supports
    the industry, then I tell you what, we are not doing a very
    good job in California. And that is our problem, not the
    problem of this bill or this effort.
        So with that, Mr. Chairman, I would yield back.
        Mr. Moore of Kansas. I thank the gentleman. And I want to
    thank the witnesses who have appeared today to testify and
    answer questions before our committee. I appreciate that very,
    very much.
        The Chair notes that some members may have additional
    questions for this panel which they may wish to submit in
    writing. Without objection, the hearing record will remain open
    for 30 days for members to submit written questions to these
    witnesses and to place their responses in the record. Again,
    thanks to the members, and thanks to the witnesses who have
    appeared today. This hearing is adjourned.
        [Whereupon, at 4:53 p.m., the hearing was adjourned.]

                                A P P E N D I X

                                 July 21, 2010