[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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                 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





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