[Senate Hearing 113-84]
[From the U.S. Government Publishing Office]




                               before the


                                 of the

                         COMMITTEE ON COMMERCE,

                      SCIENCE, AND TRANSPORTATION

                          UNITED STATES SENATE


                             FIRST SESSION


                             JULY 17, 2013


    Printed for the use of the Committee on Commerce, Science, and 

82-840                    WASHINGTON : 2013
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                             FIRST SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
BARBARA BOXER, California            JOHN THUNE, South Dakota, Ranking
BILL NELSON, Florida                 ROGER F. WICKER, Mississippi
MARIA CANTWELL, Washington           ROY BLUNT, Missouri
MARK PRYOR, Arkansas                 MARCO RUBIO, Florida
CLAIRE McCASKILL, Missouri           KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota             DEAN HELLER, Nevada
MARK WARNER, Virginia                DAN COATS, Indiana
MARK BEGICH, Alaska                  TIM SCOTT, South Carolina
RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
BRIAN SCHATZ, Hawaii                 DEB FISCHER, Nebraska
MARTIN HEINRICH, New Mexico          RON JOHNSON, Wisconsin
ED MARKEY, Massachusetts             JEFF CHIESA, New Jersey
                    Ellen L. Doneski, Staff Director
                   James Reid, Deputy Staff Director
                     John Williams, General Counsel
              David Schwietert, Republican Staff Director
              Nick Rossi, Republican Deputy Staff Director
   Rebecca Seidel, Republican General Counsel and Chief Investigator

                             AND INSURANCE

CLAIRE McCASKILL, Missouri,          DEAN HELLER, Nevada, Ranking 
    Chairman                             Member
BARBARA BOXER, California            ROY BLUNT, Missouri
MARK PRYOR, Arkansas                 KELLY AYOTTE, New Hampshire
AMY KLOBUCHAR, Minnesota             DAN COATS, Indiana
RICHARD BLUMENTHAL, Connecticut      TED CRUZ, Texas
BRIAN SCHATZ, Hawaii                 DEB FISCHER, Nebraska

                            C O N T E N T S

Hearing held on July 17, 2013....................................     1
Statement of Senator McCaskill...................................     1
Statement of Senator Heller......................................     2
Statement of Senator Blunt.......................................     4
Statement of Senator Schatz......................................     5
Statement of Senator Ayotte......................................    51
Statement of Senator Pryor.......................................    53
Statement of Senator Blumenthal..................................    54


Chuck Canterbury, National President, Fraternal Order of Police..     5
    Prepared statement...........................................     7
Matt Smith, President, Catholic Advocate.........................     9
    Prepared statement...........................................     9
Jack A. Blum, Esq................................................    10
    Prepared statement...........................................    12
Thomas A. Grissen, Chief Executive Officer, Daon.................    15
    Prepared statement...........................................    16


Letter dated July 12, 2013 to Hon. Claire McCaskill and Hon. Dean 
  Heller from Keith Whyte, Executive Director, National Council 
  on Problem Gambling............................................    59
Response to written questions submitted by Hon. Amy Klobuchar to:
    Chuck Canterbury.............................................    60
    Jack A. Blum, Esq............................................    61
Response to writtens questions submitted by Hon. Kelly Ayotte to:
    Chuck Canterbury.............................................    61
    Matt Smith...................................................    63
    Jack A. Blum, Esq............................................    63
    Thomas A. Grissen............................................    64




                        WEDNESDAY, JULY 17, 2013

                               U.S. Senate,
      Subcommittee on Consumer Protection, Product 
                             Safety, and Insurance,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:26 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Claire 
McCaskill, Chairman of the Subcommittee, presiding.

                   U.S. SENATOR FROM MISSOURI

    Senator McCaskill. Good morning. Sorry that votes delayed 
our opening today. We are glad everyone is here, and we 
appreciate your attendance at this committee--subcommittee 
    Today we will examine the expansion of online gaming and 
its implications for consumer protection and law enforcement. 
In December 2011, the Criminal Division of the Department of 
Justice issued a Memorandum Opinion that removed almost any 
Federal prohibition to online gaming, paving the way for States 
to legalize online gaming within their borders.
    Specifically, the Memorandum Opinion stated the scope of 
the Wire Act of 1961, long understood to criminalize all 
interstate online gaming, was limited only to prohibiting 
sports betting. By narrowing the scope of the Wire Act to 
sports, the Justice Department has liberated states to offer 
their in-state residents casino style online gaming.
    Online poker is already up and running in Nevada and New 
Jersey, and Delaware residents will have access to a full slate 
of online casino games this fall. Many other states are also 
actively considering the legalization of online gaming. Given 
that online gambling is a potential revenue source for cash 
strapped state governments, I fully expect more states to move 
ahead with legalized Internet gambling. And as more states act 
to legalize Internet gambling, I expect to see states authorize 
interstate compacts to allow their residents to conduct cross-
border wagering.
    The question for today's hearing is, what will be the 
consequences for consumer protection? Gambling, whether it is 
bingo or blackjack, has traditionally been regulated at the 
state level, and its state-based model remains in place for 
online gaming. Yet technology, along with interstate compacts, 
will make it incredibly easy for consumers to gamble across 
state lines without stepping foot outside their front doors.
    Given this, does a patchwork of state laws and regulations 
sufficiently protect consumers from fraud? Can it prevent 
underage and problem gambling? Does the expansion of online 
gambling provide more conduits for criminal activity, such as 
money laundering? Worse, will terrorists be able to more 
readily use online gambling sites to launder money and finance 
their activities? These are all questions--legitimate 
questions--that I think Congress must ask.
    At traditional brick and mortar casinos, the states have 
done a relatively good job of regulating gaming. However, what 
works on the floor of a casino in Las Vegas, Atlantic City, 
Biloxi, or St. Louis may not work in the virtual world of 
online gambling. The Internet provides anonymity to players, a 
luxury not afforded to criminals and fraudsters in the real 
    The anonymity of the Internet can provide minors with 
greater ability to illegally gamble, and it can allow easy 
access to individuals with gambling disorders to satiate their 
destructive habits. Is the current state-based regulatory 
regime prepared to handle all of these potential problems?
    It is worth noting that while the states have played the 
primary role in regulating gambling, Congress has also played a 
critical part. In addition to the Wire Act, Congress has passed 
a slew of gambling laws that address racketeering, sports 
betting, financial transactions, and Indian gaming. 
Furthermore, online gaming is inherently an interstate matter. 
The borderless nature of the Internet does not recognize the 
boundaries and jurisdictions of individual states. As such, 
Congress has an important role to play in overseeing the 
expansion of online gaming.
    For decades, the Wire Act was interpreted to be a Federal 
prohibition on Internet gambling. Virtually overnight, this 
legal assumption was eviscerated, and as a result, the 
landscape for the gambling industry and consumer protection has 
dramatically changed. Thus, it is entirely appropriate that 
Congress plays an oversight role to determine the consequences 
to American consumers. That is the purpose of this hearing.
    I want to thank Senator Heller for working with me on 
holding this hearing, and I want to further thank him and his 
staff for all their hard work in helping the Subcommittee 
staff. I know how important this issue is to Senator Heller, 
and I want to be as helpful and as accommodating to the Ranking 
Member as I can be. I think this is an important subject, and I 
think this discussion we are going to have today is an 
important public policy matter.
    And I will now turn it over to Senator Heller for his 
opening statement.

                    U.S. SENATOR FROM NEVADA

    Senator Heller. Good morning, Chairman. Thank you very much 
for holding this hearing, and I appreciate your remarks also. I 
want to thank the witnesses and those on the panel today for 
taking time out of their schedule to be with us today and for 
your expert testimony.
    Online gambling and its implications on consumers have been 
an issue that Congress has focused on for over a decade. As 
many know, Internet gambling was accessible to U.S. consumers 
starting in the late 1990s and in the early 2000s. Illegal 
gambling on the Internet was on the verge of exploding in the 
United States, and for many years gambling websites were run by 
offshore operators, who, in defiance of U.S. law, offered 
online sports betting as well as casino type games, such as 
slots or roulette. Some operated from foreign jurisdictions, 
but many operated from small Caribbean countries that do 
nothing to protect consumers and protect minors.
    This all changed in 2006 when Congress, including seven 
members of this committee--four Democrats and three 
Republicans--enacted UIGEA, the Unlawful Internet Gambling 
Enforcement Act, to put an end to this wagering. The law was 
effective, and it was effective in going after the bad guy. But 
it was not a perfect law. There were still some issues that 
needed to be addressed in the bill in order to give our Federal 
agencies the tools they needed to stop illegal Internet 
    Then we fast forward to December 23, 2011. What happened on 
December 23, 2011? The Department of Justice reversed its 
interpretation of the Wire Act. So, 50 years of precedent--50 
years of precedent--was overturned. The Department of Justice 
argued that under the Wire Act, interstate gambling falls 
within the statute, even if the wire communications originate 
and terminates in the same state, provided the wire cross state 
lines at some point in the process. Because of this 
interpretation, all online wagering fell under the Wire Act.
    With one decision, the Department of Justice effectively 
rendered all laws that have been on our books, put together by 
Members of Congress for over 50 years, that this very body 
passed 2 days before Christmas, and made it useless to regulate 
and stop Internet gambling.
    The results are the floodgates are now open to states 
legalizing all forms of Internet gambling, such as casino games 
and lotteries. Five states have already acted, including the 
State of Nevada, and 20 more are looking to act. Patchwork 
state and tribal regulations have sparked a regulatory race to 
the bottom. States that already do not allow Internet gambling 
will have difficulty now enforcing their own laws. On top of 
that, no discussion has been had as to consumer protections--
what consumer protections will be afforded, if any, under the 
patchwork system of state regulations.
    And as we will hear from our witnesses today, due to the 
regulatory uncertainty created by that 2011 decision, the 
Internet has effectively turned into the Wild West for online 
gaming. Not only does it present an opportunity for criminals 
and terrorist organizations to launder money with transactions 
happening under the radar, but there are issues of cheating and 
identity theft without any recourse for consumers. There are 
also little, if any, regulatory standards required by these 
websites to securely ensure those who are playing the game are 
who they say they are, the age they say they are, and where 
they say they are.
    I believe that technology does exist that can meet this 
goal either through biometrics or geo-location data, and I look 
forward to seeing the presentation of such technology software 
from one of our witnesses today. Such standards provide 
protections for all consumers, particularly underage and 
problem gamblers. We must, however, be able to account for the 
ever-changing technologies of the Internet.
    And finally, I believe that we need to examine whether or 
not law enforcement has the appropriate tools to either shut 
down or regulate the space. In the past, I have been vocal 
about my belief that law enforcement lacks the authority. 
Congress needs to provide clarity and guidance on these issues. 
If we do not, this illegal market will continue to grow where 
millions of consumers are put at risk, and criminals can act 
    I firmly believe that Congress has the unique opportunity 
to act by updating the Wire Act and clarifying other existing 
statutes that govern Internet gambling before it is too late 
and states become dependent on this new source of revenue. I 
also believe that Congress should examine the merits of 
providing a path forward for limited federally regulated online 
poker. Poker, a game of skill, not a game of chance, is 
different than other house bank games, such as blackjack or 
roulette. I believe that if given the opportunity, appropriate 
consumer protection standards could be in place to protect 
American consumers, while still providing for a play of this 
nationally-recognized peer-to-peer game.
    So with that, I again thank the Chairwoman for examining 
this issue today as important as it is may be to Nevada, it is 
to New Jersey, as it is to Mississippi, and frankly 48 out of 
50 states. So thank you very much. And again, to our panelists 
for being here today, for your testimony and helping us better 
under the consumer issues that we are facing. I look forward to 
hearing from you. Thank you.
    Senator McCaskill. Thank you, Senator Heller.
    I welcome my colleague from Missouri. I am loathe to use 
the word ``senior'' at my age, so we try not to be senior or 
not senior. We just try to work together whenever we can, even 
though we have some policy disagreements from time to time. And 
I want to welcome Senator Schatz also for being here. I am 
happy to give each of you a minute or two if you would like to 
say anything before we begin with the witnesses.

                 STATEMENT OF HON. ROY BLUNT, 
                   U.S. SENATOR FROM MISSOURI

    Senator Blunt. I would just briefly say, Chairman, that I 
was in the House in 2006 when we passed the Unlawful Internet 
Enforcement Act. I supported it. It did lean heavily on the 
Wire Act and what we all thought at the time was the 
traditional and would be the ongoing interpretation of the Wire 
Act. And the new interpretation of that Act largely has opened 
the door, as both of you have well explained, to many 
unintended consequences.
    A state like ours that has a lottery, whatever they decide 
that they may be allowed to do, but they should not be 
competing with offshore competitors and competitors that are 
unlicensed, unregistered, unregulated. And so, I am grateful to 
both of you for having this hearing today.
    Senator McCaskill. Senator Schatz?

                    U.S. SENATOR FROM HAWAII

    Senator Schatz. Thank you, Chairwoman McCaskill and Ranking 
Member Heller. Thank you for bringing this issue to the table.
    As you all know, the State of Hawaii prohibits all forms of 
gambling. This ban reflects my view and the view of our 
congressional delegation, and most of the popular will of the 
state of Hawaii. And so, I am particularly interested as we 
assess the need for new Federal and state regulatory policies, 
how that is going to intersect with the state of Hawaii and our 
stated public policy, because as you pointed out, Madam 
Chairwoman, it is not going to recognize any of our statutory 
jurisdiction in the state of Hawaii, because people can gamble 
from whatever device they choose to utilize. So, this is 
important for the state of Hawaii, although it has not quite 
the nexus that it has for the state of Nevada.
    Senator McCaskill. Thank you, Senator. I welcome our 
witnesses today. I will apologize now. I have another hearing 
that is an urgent matter for me that I will have to duck out 
for at some time during our proceedings this morning. It will 
be my intention to get--to time my leaving here so I can 
immediately do the questioning I need to do in that hearing, 
and immediately return so I will have an opportunity hopefully 
to ask questions. But I did not want any of you to think that 
if I leave before all of your testimony is finished that I am 
not interested and very engaged in this topic. When I leave, I 
will turn the Committee over to Senator Heller to chair in my 
absence, and I know he will do a great job at that.
    We welcome Mr. Chuck Canterbury, National President of the 
Fraternal Order of Police--I thank you for being here--Mr. Matt 
Smith, President of the Catholic Advocate here in Washington, 
D.C., Mr. Thomas A. Grissen, Chief Executive Officer of Daon--
am I saying that correctly, Mr. Grissen?
    Mr. Grissen. That is right.
    Senator McCaskill. And Mr. Jack Blum, an attorney from 
Annapolis, Maryland. Thank you all for being here, and we will 
begin with you, Mr. Canterbury. Welcome.
    As a former prosecutor, I am always in uniform withdrawal, 
so I have great respect for all of you and your members, and 
look forward to your testimony.

                        ORDER OF POLICE

    Mr. Canterbury. Good morning, Madam Chairman, Senator 
Heller, and other distinguished members of this Subcommittee on 
Consumer Protection, Product Safety, and Insurance. It seems 
like there is a plethora of former prosecutors in the Senate, 
and we always like coming to testify before the people that we 
have worked with at home. And we appreciate you holding this 
    My name is Chuck Canterbury. I am the National President of 
the Fraternal Order of Police. We are the largest law 
enforcement labor organization in the United States 
representing over 330,000 rank-and-file police officers in the 
country. Again, thank you for having us here this morning, and 
we would like to share the views of the FOP on the impact that 
Internet gaming may have on public safety and the need to 
update and modernize the Wire Act.
    We are in a wireless age, and it is clear that the Wire Act 
is an old law ill-suited to addressing our new problems. The 
Interstate Wire Act was enacted in 1961. Well, in 1961 we were 
dealing with the Bay of Pigs, the Beatles were first performing 
in the United States, and our current President was born. The 
FOP strongly believes it is time for our nation's legal 
framework to catch up to the technology that it seeks to 
    In 2006, the FOP strongly supported the enactment of the 
Unlawful Internet Gaming or Gambling Enforcement Act. The law 
did not expand or redefine any criminal activity, but it did 
require financial transaction providers to block and refuse 
transactions associated with Internet gaming. The aim of this 
legislation was not only to enforce the existing laws, but also 
to help combat the use of offshore gambling operations that 
launder money from other criminal enterprises.
    In 2011, the Assistant Attorney General of the Criminal 
Division issued a Memorandum Opinion, which held that the Wire 
Act prohibited only sports betting and no other forms of online 
wagering. Overnight, the investigation of money laundering by 
organized crime and other unlawful enterprises became a lot 
more difficult.
    A 2012 report by the U.S. Department of State notes that 
the Internet gaming industry is laundering millions of dollars 
through Costa Rica, which has become a bridge country used to 
send money to and from other nations and other jurisdictions. I 
think it is telling that 4 of the 11 individuals indicted by 
the Department of Justice for operating online gaming sites 
listed their residence as Costa Rica.
    These 11 defendants were charged with violations of the 
UIGEA, and the Illegal Gambling Business Act, and the later 
Federal statute, which was adopted by Congress in 1970 in an 
effort to attack the profits of organized crime. However, the 
key component to this law is that there must be a state statute 
prohibiting the activity, which then allows the Federal 
Government to investigate and prosecute the case.
    Because of the differences in state law, there are cases in 
which Federal authorities would be precluded from using the 
IGBA to interdict unlawful activity from being considered in 
offshore sites. We know this for certain: organized crime is 
using offshore online operations to launder their profits. We 
also know that terrorist organizations are or could be using 
the same strategies to launder funds.
    According to the counterterrorist analysts at Jane's 
Strategic Advisory Service, there are indications that 
terrorists in Afghanistan have been using illegal gaming sites 
to launder their money. And money laundering is hardly the only 
threat. Millions of Americans wager regularly on offshore 
Internet gambling sites beyond the reach of the Federal 
Government. Without the authority previously provided by the 
Wire Act, there is no legal or regulatory framework for law 
enforcement to shut down this illegal activity.
    These Americans will have no recourse if they become 
victims of fraud or other criminal acts. There is no 
enforcement mechanism to provide prompt and accurate payments, 
to prevent criminals from entering the marketplace, rigging 
games, taking advantage of our children, or misusing customer 
identification and financial data.
    The FOP is not advocating for any expansion in what online 
gaming activity is deemed unlawful. With changes in how the 
Wire Act can be used, the limitations of both the UIGEA and 
IGBA, law enforcement in the United States does not have the 
means to effectively identify and shut down these operations. I 
believe U.S. law enforcement can rise to the challenge and 
successfully attack online fraud, money laundering, and illegal 
    Frankly, it's ridiculous that the Federal Government 
continues to regulate dynamic, ever-changing technology with 
legislation crafted more than five decades ago. It is vital we 
address this issue before we fall even further behind.
    Thank you very much for allowing us to be here today.
    [The prepared statement of Mr. Canterbury follows:]

      Prepared Statement of Chuck Canterbury, National President, 
                 Grand Lodge, Fraternal Order of Police
    Good morning, Madam Chairman, Senator Heller and the distinguished 
members of the Subcommittee on Consumer Protection, Product Safety and 
Insurance. My name is Chuck Canterbury, National President of the 
Fraternal Order of Police, the largest law enforcement labor 
organization in the United States, representing more than 330,000 rank-
and-file police officers in every region of the country.
    I want to thank you for inviting me here this morning to share the 
views of the Fraternal Order of Police on the impact Internet gaming 
may have on public safety and the need to update and modernize the Wire 
    The 2011 Memorandum Opinion for the Assistant Attorney General of 
the Criminal Division in the U.S. Department of Justice held that the 
Wire Act of 1961 did not prohibit state lotteries from selling tickets 
online. It also reinterpreted the statute much more narrowly, holding 
that the Act only prohibited sports betting and not other forms of 
online wagering.
    We are in a wireless age and it is clear that the Wire Act is an 
old law ill-suited to addressing our new problems. The Interstate Wire 
Act was enacted in 1961--a time when the great-grandfather of the 
Internet, ARPANET, was still in its embryonic stage. The FOP strongly 
believes it is time for our nation's legal framework to catch up to the 
technology it seeks to regulate.
    The FOP has been very active on these issues and we have repeatedly 
urged the Administration and Congress to work with us to update this 
law and give law enforcement the tools they need to successfully 
investigate and prosecute these crimes.
    In 2006, the FOP supported the enactment of the ``Unlawful Internet 
Gambling Enforcement Act.'' This law did not address expand or redefine 
any criminal activity but it did require financial transaction 
providers to block and refuse transactions associated with illegal 
gambling. The aim of law enforcement in supporting this legislation was 
not only to enforce existing gambling laws--like the Wire Act as it was 
interpreted and applied at that time--but also to help combat the use 
of these offshore gambling operations to launder money from other 
criminal enterprises. It is clear from testimonies given before 
Congress on this issue and the new application of the statute as 
interpreted by the Justice Department that law enforcement needs a 
better, clearer framework as well as new tools if we are to achieve 
these ends.
    Money laundering is hardly the only threat. Millions of Americans 
wager regularly on offshore Internet gambling sites beyond the reach of 
the Federal Government. Without the authority previously provided by 
the Wire Act, there is no legal or regulatory framework for law 
enforcement to shut down illegal activity and millions of Americans 
will have no recourse if they become the victims of fraud or other 
criminal acts to seek redress. There is no enforcement mechanism to 
provide prompt and accurate payments, to prevent criminals from 
entering the marketplace, rigging games, taking advantage of children, 
or misusing customer identification and financial data.
    The U.S. Department of State's 2012 International Narcotics Control 
Strategy Report (INCSR) stated:

        While not a major regional financial center, Costa Rica remains 
        vulnerable to money laundering and other financial crimes, 
        including various schemes that target U.S.-based victims. Money 
        laundering activities are primarily related to the foreign 
        proceeds of international trafficking in cocaine. A sizeable 
        Internet gaming industry also launders millions of dollars in 
        illicit proceeds through Costa Rica and offshore centers 

    The Costa Rican government reported that their nation is primarily 
used as a ``bridge'' to send money to and from jurisdictions and other 
offshore financial centers. The State Department noted several 
obstacles preventing the Costa Rican government from properly 
investigating and prosecuting money laundering offenses by not fully 
utilizing law enforcement tools like cooperating witnesses, 
confidential informants, electronic surveillance and undercover 
operations. In addition, money laundering cannot be charged as an 
additional offense to another crime in Costa Rica. You can prosecute 
and convict an individual for narcotics trafficking, but then they 
cannot also be charged with laundering the profits from the drug sales.
    Organized criminals engaged in money laundering know that they can 
exploit these shortcomings in countries like Costa Rica, which is why 
they set up shop there. This is starkly demonstrated by the fact that 4 
of the 11 individuals indicted by the U.S. Department of Justice for 
operating online gaming sites listed their residence as Costa Rica.
    These 11 defendants were charged for violations of UIGEA and the 
Illegal Gambling Business Act (IGBA). The latter Federal statute was 
adopted by Congress in 1970 in an effort to attack the profits of 
organized crime. Apart from the individual making the wager, the 
statute allows any person that plays a role in the business or 
organization of conducting a gambling business to be charged with 
violating or conspiring to violate the Act. A key component to this 
law, however, is that there must be a State statute prohibiting the 
activity, which then would allow the Federal Government to investigate 
and prosecute the case.
    The IGBA does provide law enforcement with some means to 
investigate organized money laundering based offshore. It also presents 
some questions about the reach of the law because the activation of the 
statute is dependent upon the state law. The indictments I mentioned 
earlier were brought using the State of New York, which defines 
gambling as taking place based on the location of the bettor. In other 
states, bettors may be able to call-in their wagers to an offshore 
bookmaker and not be in violation of state law, thus precluding the 
Federal Government from using the IGBA to go after these criminal 
    Recent reports and investigations in Europe demonstrate that 
organized crime in Italy is laundering what one law enforcement 
official described as ``enormous amounts of money'' using online gaming 
sites in Germany. In 2007, the individual German states took over 
regulation of gambling, but there are no criminal penalties for using 
or operating an illegal gambling site. The illegal online gaming market 
is booming in Germany and criminal enterprises are taking advantage of 
    We know this for certain: organized crime is using offshore online 
operations to launder their profits. We also know that terrorist 
organizations are or could be using the same strategies to launder 
funds. According to counterterrorist analysts at Jane's Strategic 
Advisory Service, there are indications that terrorists in Afghanistan 
have been using illegal gaming sites to launder their money.
    Illegal profits from unlawful activities are not of much use to 
criminal operations unless the money can be cleaned through legitimate 
channels. Without money laundering, organized crime could not exist. 
With changes in the how the Wire Act can be used, the limitations of 
both the UIGEA and IGBA, law enforcement in the United States does not 
have the means to effectively identify and shut down these operations.
    The FOP is not advocating for any expansion in defining what online 
gaming activity is deemed unlawful. This was the position we took when 
we supported UIGEA and it is the position we still hold.
    I believe U.S. law enforcement can rise to the challenge and 
successfully attack online fraud, money laundering and illegal gaming. 
Frankly, it is ridiculous that the Federal Government continues to 
regulate dynamic, ever-changing technology with legislation crafted in 
1961. In 1961, we were dealing with the Bay of Pigs, the Beatles were 
first preforming and President Obama was born. Time certainly has 
marched forward and it is vital we address this issue before we fall 
even further behind. Continuing to wait on this issue will only cause 
it to become more serious.
    We need Congress and the Administration to work with Federal, state 
and local law enforcement to devise an enforcement and regulator 
framework that will allow us to identify and go after organizations and 
businesses that are participating in or funding illegal activity. I am 
confident that we can do that if we work together.
    I want to thank you again, Madam Chairman and Senator Heller, for 
the invitation to testify here today and I am ready to answer any 
questions you may have.

    Senator McCaskill. Thank you, Mr. Canterbury.
    We welcome Mr. Matt Smith from the Catholic Advocate. Thank 
you, Mr. Smith.

                       CATHOLIC ADVOCATE

    Mr. Smith. Thank you, Madam Chairman and Senators. Nearly 7 
years ago, Congress voted overwhelmingly to protect vulnerable 
communities within our country, as well as the integrity of 
professional sports, by stopping the expansion of gambling on 
the Internet. Unfortunately, Congress' clear intent in the 
Unlawful Internet Gambling Act of 2006, UIGEA, is now under 
    At the behest of two state lotteries 2 days before 
Christmas, as Senator Heller already stated, the Justice 
Department announced it was upending more than five decades of 
consistent interpretation of the Wire Act, which prohibited all 
gambling over the Internet, with a new unilateral opinion that 
the law simply applied to online sports gambling. The 
Department of Justice's floodgates, as Senator Heller also 
stated, have opened the floodgates for states to accelerate 
plans, many already underway, to go even beyond ticket sales to 
offer casino-like games on the Internet under the umbrella of 
their State lottery.
    The CEO of the leading provider of lottery services in the 
United States was quoted saying, ``The DOJ ruling does not 
limit the sale of authorized products solely to State 
lotteries. I think it's possible that if lotteries are B-to-
market, they could be tarnished by the early entrance and also 
risk the ability to attract younger players.'' It is those 
younger players and other vulnerable populations, like seniors, 
who are most at risk. Ninety-three percent of teens aged 12 to 
17 utilize the Internet, and 97 percent of teens of the same 
age participate in some form of online gaming, making them 
attractive targets for gambling marketing, as well as illegal 
and fraudulent operators.
    By reinstating the more than 50-year interpretation of the 
Wire Act and strengthening UIGEA, you can protect our children 
and families from the erosion of safeguards Congress has 
previously established.
    We recognize Congress did not create this problem, but here 
is an opportunity to address an impending matter before it 
becomes a crisis. Congress has the power to protect our 
seniors, our children, and give law enforcement the tools they 
need to protect the vulnerable from illegal predatory gambling 
interests. We urge bipartisan congressional action to restrict 
the imminent expansion of online gambling throughout states, 
lotteries, and offshore operators, and believe Federal 
restriction of online gambling is vital, urgent, and consistent 
with congressional intent.
    Thank you.
    [The prepared statement of Mr. Smith follows:]

     Prepared Statement of Matt Smith, President, Catholic Advocate
    Nearly seven years ago, Congress voted overwhelmingly to protect 
vulnerable communities within our country as well as the integrity of 
professional sports by stopping the expansion of gambling on the 
Internet. Unfortunately Congress' clear intent in the Unlawful Internet 
Gambling Act of 2006 (UIGEA) is now under assault.
    A pro-Internet gambling coalition of large states desperate for 
more revenue and foreign-owned gambling companies have lobbied the 
Executive Branch to get around Congress' intended protections and, at 
the end of 2011, they received an extraordinary boost from an unlikely 
source: the U.S. Department of Justice. On Friday, December 23, 2011, 
the Justice Department (DOJ) announced it was upending more than five 
decades of consistent interpretation of the 1961 Wire Act which 
prohibited all gambling over the Internet with a new, unilateral 
opinion that the law simply applied to online sports gambling.
    The Wall Street Journal described what happened next: ``When the 
U.S. Justice Department in December narrowed its interpretation of the 
50-year-old Wire Act, saying it banned only sports betting and not 
other forms of online gambling, the decision sparked hope in state 
capitals that lotteries could start selling tickets online and lead a 
charge into online gambling.'' The ``charge into online gambling'' was 
exactly what Congress intended to prevent--with very good reason.
    DOJ's determination has opened the flood gates for states to 
accelerate plans, many already underway, to go even beyond ticket sales 
to offer casino-like games on the Internet under the umbrella of their 
state lottery system. Several states have either passed online gambling 
statutes or are in the process of passing them quickly in upcoming 
sessions to take advantage of the Department of Justice ruling.
    The CEO of the leading provider of lottery services in the United 
States has said, ``The DOJ ruling does not limit the sale of authorized 
products solely to state lotteries. I think it's possible that if 
lotteries are beat to market, they could be tarnished by the early 
entrants and also risk losing the ability to attract younger players.''
    It's those ``younger players'' and other vulnerable populations 
like seniors who are at the most serious risk. Ninety-three percent (93 
percent) of teens age 12-17 utilize the Internet and 97 percent of 
teens of the same age participate in some form of online gaming making 
them attractive targets for gambling marketing as well as illegal and 
fraudulent operators.
    Often, Congress is put in situations where issues that are already 
problems require solutions. Here is an opportunity to address an 
impending matter before it becomes a crisis. Congress still can act to 
reassert its authority and re-establish its intent to prevent the 
proliferation of online gambling in the U.S. By reinstating the more 
than 50-year old interpretation of the Wire Act and actually 
strengthening UIGEA, you can protect our children and families from the 
erosion of safeguards Congress has previously established.
    We recognize Congress did not create this problem. Congress, 
though, does have the power to protect our seniors, our children, and 
give law enforcement the tools they need to protect the vulnerable from 
illegal predatory gambling interests. We urge bi-partisan congressional 
action to restrict the imminent expansion of online gambling throughout 
states, lotteries, and off-shore operators. Federal restriction of 
online gambling is vital, urgent, and consistent with recent 
congressional intent.

    Senator McCaskill. Thank you, Mr. Smith.
    We will now hear from Mr. Blum. Thank you very much for 
being here.

                STATEMENT OF JACK A. BLUM, ESQ.

    Mr. Blum. Thank you, Senator. My name is Jack Blum. I am a 
Washington, D.C. attorney, and I specialize in money laundering 
compliance, offshore tax evasion, and financial crime. I am 
here this morning at the request of the Committee. I have no 
client interest at all in the gambling business. I think 
gambling is dumb, I do not do it, and so much for that.
    Gambling and organized crime have quite a history, and I 
think it is worth spending a minute on that history because it 
is the origin of the Wire Act, and it is the heart of one of 
the big problems we are facing.
    Al Capone got caught for income tax evasion, and Meyer 
Lansky was a man who solved the problem for organized crime way 
back when. And his idea was to own a racetrack, and use the 
racetrack as a way of legitimizing the take from organized 
crime. He got the Batista regime in Cuba to give him control of 
the racetracks, and all of the organized crime money from the 
East Coast went into banks in Florida, essentially as winnings 
from the Cuban tracks. I saw the same thing go on again in the 
Caribbean when I worked on the island of St. Maarten, and I saw 
planeloads of cash coming into the airport in St. Maarten going 
into the bank, being deposited by an Italian Mafioso, who then 
controlled all of the casinos on the island. His idea was this 
is winnings from the casino, and, of course, if you went into 
the casinos, there were no customers there. But that was not 
why the casinos existed.
    So, the question of who owns a casino is pivotal, and that 
is why casinos have to be licensed, and that is why states, 
like Nevada, New Jersey, who have brick and mortar casinos, go 
through a very vigorous and rigorous process of licensing 
casino owners. Now, I think that the problem of going on the 
Internet has made the issue of licensing even more important. 
Who is it that has this Internet casino? Is it someone 
legitimate? And here, the problem is they can operate from 
anywhere, and I really cannot fathom how any states can control 
something that operates that way from anywhere in any 
    The offshore casinos have figured out how to evade U.S. 
law. They have been doing it for a long time. If you want to 
take a look at it, all you have to do is go on the web and do a 
search. And now on top of everything else, we have an 
artificial currency called ``Bit-Coin,'' which could even take 
it out of the realm of being able to police it through the 
banking system.
    I began to look into one aspect of this for part of the 
Federal Government, which is the offshore merchant business, 
and we were trying to figure out how people were using offshore 
accounts to evade taxes. We discovered that there were service 
companies in places like Bermuda and elsewhere that were 
offering completely set up online casinos to people, and these 
casinos were part of what were called, ``protected shell 
corporations.'' The protected shell corporations had no visible 
owners. If you went to Bermuda, all you could find would be the 
parent company of the protected shell, which actually had the 
bank account, and there would be no way of getting to the 
person who really owned the casino. That is, from a regulatory 
point of view, a complete nightmare.
    In truth, the casino is a bank. Any business organization 
that has an encrypted switch and can take open accounts, take 
money, and send money, is operating as a bank. And as a bank, 
it comes under the Bank Secrecy Act and all of the rules 
regarding money laundering.
    So the question is, how do you now regulate these online 
casinos in any meaningful way, and how do you apply the Bank 
Secrecy Act to it? We are currently having a huge problem with 
our regular banks, getting them to comply with money laundering 
laws. I am sure you have all seen the accounts of HSBC, a major 
international bank, laundering $4 trillion. If the Treasury 
Department is having a problem with HSBC, how is it going to 
handle the Internet gaming industry, which is sprawling and 
    Up until now, it has been the banking industry which has 
controlled the offshore gaming industry. And the way that 
worked was the prohibitions of the Uniform Act, which said 
banks really were the ones who were responsible for preventing 
the opening of accounts without knowing your customer, without 
being sure that the customer was legitimate. Now that that Act 
has been undermined, the banks are wide open to accept these 
customers without the kinds of money laundering controls that 
previously existed.
    My belief is the only way we can get on top of this is to 
have a regulatory agency at the Federal level that licenses 
online casinos where casinos are prohibited--foreign casinos 
are prohibited from operating in the U.S., and any U.S. player 
who uses one is subject to penalty. And that way, we might 
possibly be able to both tax and control the bad behavior of 
the people who want to use casinos to launder money.
    My special concern is that some of this casino operation 
could be used to move funds from the United States to a foreign 
destination. Gambler in the U.S. sets up an account, puts money 
in the account. The unscrupulous casino operator sends the 
money to another account in an offshore location. Likewise the 
money could be moved back exactly the same way.
    We really have to have comprehensive Federal regulation, 
sophisticated Federal regulation, and it should happen sooner 
rather than later because, as I say in my prepared testimony, 
the cat is out of the bag.
    Thank you.
    [The prepared statement of Mr. Blum follows:]

                Prepared Statement of Jack A. Blum, Esq.
    My name is Jack A. Blum. I am a Washington, D.C. lawyer 
specializing in money laundering compliance, offshore tax evasion and 
financial crime. I am appearing here this morning at the request of the 
Committee. I do not have clients with an interest in Internet gambling. 
Personally, I think gambling is dumb and I learned early on that the 
house always wins.
    Gambling and organized crime have had a long standing relationship. 
When the Justice Department nailed Al Capone it was for tax evasion. 
The financial wizard of organized crime, Meyer Lansky, understood that 
criminal proceeds had to be legitimized. He taught the criminal world 
that the best way to do it was to own either a race track or a gambling 
casino. Lansky gained control of Cuba's race tracks before the outbreak 
of World War II. The East Coast's organized crime families deposited 
their profits from prostitution, illegal gambling, and drugs in the 
Cuban race track's bank accounts in Florida as the track's take on the 
pari-mutuel betting in Cuba. Magically, criminal proceeds from the U.S. 
East Coast became legitmate race track profits from Havana.
    In the early 1990s I was hired to investigate money laundering on 
the Caribbean island of St. Maarten. An Italian with organized crime 
connections had taken over the island casino business. Each day the 
casinos deposited large amounts of cash as the ``house take.'' In fact 
when I visited the casinos there were very few customers and hardly 
enough activity to bother keeping the doors open. I found the 
explanation at the St. Maarten airport where each day flights would 
arrive from San Juan and Miami and would be met by armored cars. 
Mailbags of cash were offloaded and taken to the banks to be deposited 
as gambling winnings. The Dutch Ministry of Justice and the DEA broke 
the mafia hold on the island and the laundering stopped--at least for a 
    The moral of these stories is simple--casino ownership and 
operation must be regulated. Casino books need to be audited and the 
gaming should be supervised to prevent buying and selling chips from 
becoming another way of laundering cash and to prevent the casino being 
used to cover large criminal money movements. The states that got into 
the business early, Nevada and New Jersey learned their regulatory 
lessons the hard way and established respected regulatory 
organizations. Other states followed suit and as long a gambling was 
tied to bricks and mortar the problems were manageable.
    Unfortunately, the development of the Internet and global 
electronic commerce has made serious control of gambling very 
difficult. In the new world of electronic commerce the definition of a 
financial institution has become any business enterprise that has an 
encrypted switch--that is to say it has customer accounts from which 
funds come and go and which are protected through some form of 
encryption. Functionally an online casino is no different than a bank 
even though its purpose is different. It has customer accounts that 
have balances. Customers can add or withdraw money at will, and if the 
operator is willing, balances can be transferred from one account to 
another. It stands to reason that a casino should have the same anti-
money laundering controls that banks have. Casinos should be required 
to know their customers, they should be required to monitor accounts 
for suspicious transactions, and casinos should be audited for the 
protection of customers and to insure compliance with the anti-money 
laundering regime.
    Online casinos can operate from any jurisdiction. Offshore casinos 
have developed sophisticated methods of avoiding supervision and U.S. 
law. I suspect more than a few of the existing offshore casinos have 
money laundering and illicit funds transfer as their principal purpose.
    To make matters worse we now must confront the use of artificial 
currency such as the Bitcoin that is beyond the reach of governments.
    As part of a consulting assignment for a Federal agency I began to 
look into what is called the offshore merchant business. The idea 
behind becoming an offshore merchant was that a business based on the 
Internet could direct all customer payments for services in the U.S. to 
an offshore account that would accept credit cards. The funds would be 
untraceable and the offshore merchant would thus avoid showing income 
in the U.S. and evade Federal and state tax.
    To make the offshore operation opaque service providers in offshore 
jurisdictions offered ``cells'' in what are called protected cell 
companies. These companies have an overarching company with bank 
accounts and a visible identity, but they are made up of individual 
cells, each with a different owner, and each financially independent of 
the other. There is no way for foreign law enforcement to find the 
ownership of the individual cell companies. Even the local governments 
do not know the owners of the cells.
    Protected cells are just one of a number of ways of hiding 
financial operations offshore. Untraceable shell companies, trusts and 
other devices are in widespread use. Indeed, Senator Levin has 
introduced legislation aimed at putting an end to anonymous 
corporations here in the U.S.--legislation that I strongly support.
    In doing my research, I found several service providers who offered 
casino gambling site software with a full complement of games and the 
ability to set up individual customer accounts. By the way--many of 
these same service providers also offered pornographic sites protected 
by a pay firewall. The software is designed to be controlled by an 
individual cell company far out of reach of regulation, taxation, and 
prosecution for fraud.
    Congressional efforts at controlling offshore online gambling 
activities have met with limited success. The principal piece of 
legislation in this area is the 2006 Unlawful Internet Gambling 
Enforcement Act. That Act bars the use of checks and credit cards in 
payment for illegal gambling activities. The word is ``illegal.'' The 
definition of illegal was based on the Wire Act of 1961 that banned the 
use of interstate wire communications for both sports and no-sports 
gambling. The ban on the use of payment systems put the banks in the 
business of policing customers to make sure the only online firms that 
used bank accounts and credit cards were offering ``legal'' gambling 
services--that is to say gambling allowed by state law.
    The one prosecution and conviction of note under the UIGEA targeted 
the operators of a sports book based in Antigua that accepted bets from 
U.S. persons. The operators of the sports book, Daniel Eremian and Todd 
Lyons, operated openly and flamboyantly, almost daring the Department 
of Justice to prosecute. Most likely at their instigation the 
government of Antigua filed a complaint against the United States under 
the WTO rules. Antigua claimed that the U.S. law aimed at their 
offshore casinos was an act of trade discrimination.
    As the prosecution of Sports Offshore was taking place, the 
Department of Justice changed its interpretation of the Wire Act. It 
said that the Act only applied to sports betting. The Justice opinion 
ended the effectiveness of the ban on bank transfers and credit cards 
for casinos that limited themselves to electronic table games and slots 
and left the field wide open for gambling websites. After the DOJ 
opinion, websites that offered casino games that were now considered 
legal could use bank payment systems.
    To the extent that the controls on payments for online gambling 
worked, they kept American customers away from the offshore sites. The 
Justice Department decision to give up on the control of interstate 
gambling other that sports gambling has opened the door wide to any 
entrepreneur legitimate or otherwise who wants to get in the business. 
It tore up the Wire Act--an Act that was the result of extensive 
hearings on organized crime and gambling by Senator Estes Kefauver and 
the Senate Permanent Investigations Subcommittee. It left behind a maze 
of state laws and no real way of regulating the Internet gambling 
    The current situation raises the question of whether there will be 
any controls on the business of Internet gambling or whether we will go 
back to the days of Al Capone and Meyer Lansky. To prevent money 
laundering through an Internet site the sites will have to be licensed, 
audited, and regulated. The applicants for a license will have to be 
screened for fitness and to ensure they do not have criminal pasts or 
criminal connections. The operations will have to be audited to insure 
that the stated earnings in fact come from ``house'' winnings. 
Customers will have to be subjected to due diligence under `know your 
customer' rules. Casino operators will have to file suspicious activity 
reports on customer accounts with the Treasury's FINCEN. They will have 
to be audited to insure the suspicious activity reports are in fact 
filed and that the operators are screening customers and the activity 
in customer accounts.
    There will also have to be systems to insure that winnings are 
reported to IRS and taxes are paid.
    Finally, the auditors will have to insure that the online casinos 
do not become sophisticated money transfer systems--a kind of online 
Hawala exchange. An unscrupulous operator could take funds from a U.S. 
gambler, and pay ``winnings'' to a foreign player's account. Or the 
money could move from an offshore player to an onshore player. The 
possibilities for terrorist financing and for moving the proceeds of 
white collar crime using this system are endless.
    What part of government will take on the regulatory responsibility? 
What part of the government is equipped to supervise a sophisticated 
and very large financial industry? Most certainly it cannot be the 
IRS--an agency that has had its budget cut three times in the past 
three years and has been given the added responsibility of implementing 
the new healthcare legislation. You will have to create a new 
specialized regulatory agency, perhaps as a part of the Treasury 
Department that will take on the job.
    The regulatory problem cannot be solved by a software system alone 
no matter how sophisticated the system is. Screening systems all 
require human intervention to screen the computer search results and to 
integrate the results in ways that lead to enforcement action. Moreover 
we have all seen what happens when a financial institution, which a 
casino is, gives up on its regulatory responsibility. The example I 
have in mind is HSBC which laundered four trillion dollars in drug 
money, computer screening systems notwithstanding.
    I believe that the new regulatory agency Congress will have to 
create will have to be staffed by experts with the resources to do the 
hard work of keeping the industry honest. I do not think this kind of 
regulation can be done at the state level. The regulation will be 
expensive and the industry will have to be taxed to pay for regulation.
    I do not believe prohibiting Internet gambling will work. The horse 
has left the barn. The Internet is too open to control and in any event 
controls will not work across state and national borders. What we have 
to hope is that a new Federal agency can inspire enough trust to 
encourage customers to use U.S. sites, and that competitors will report 
problem sites to the regulators and the law enforcement authorities. 
The regulators will also have to screen the Internet regularly for pop-
up casino sites that are attempting to avoid controls. There will have 
to be limits placed on bank transfers to offshore casinos.
    You will have to address the issue of online gambling one way or 
another. The sooner the problem is addressed the better because the 
present situation is out of control. A simple Internet search for 
online casinos will show you how many players have entered the field. 
Crafting appropriate legislation will take a concerted effort by 
Congress with the help of the agencies now tasked with money laundering 
    I hope you have found this testimony helpful and I will be happy to 
answer any questions you may have.

    Senator McCaskill. Thank you, Mr. Blum. And all of your 
statements will be included in the record.
    Mr. Blum. Thank you.
    Senator McCaskill. Mr. Grissen?


    Mr. Grissen. Thank you, Madam Chair, Ranking Member Heller, 
and other members of the Subcommittee. I appreciate the 
opportunity to testify and discuss some of the topics in front 
of this committee. You have my written testimony. I hope you 
find today's demonstration valuable. I appreciate your insight 
to see the new innovative technologies.
    I will just take a few seconds to make three points prior 
to proceeding with the demonstration. The first point is that I 
am not a proponent or an opponent to Internet gaming. My focus 
is on technology and establishing trust on the Internet and 
those people that interact online. I do share your concerns 
about the developments that are occurring in the states.
    The second point would be that there is a much broader 
consumer protection concern that spans all industries, not just 
Internet gambling. You may have seen today's USA Today. 
Colleges are struggling with online courses to make sure that 
the person enrolled and that is doing the homework, is the same 
person who takes the exam, so the concerns are widespread.
    And this all comes back down to establishing a means of 
trust, so how do we know that the person we are interacting 
with are who they claim to be, and how do I protect and assert 
my identity?
    Other industries are moving forward. Probably one of the 
first adopters of the technology would be banking. Their 
concerns are both in terms of differentiating the brand, but 
also security fraud and regulatory compliance. These industries 
are adopting new technologies, including biometrics, and 
biometrics are just factors that are uniquely you. Your voice 
would be different than my voice. Your face would be different 
than my face. Your fingerprint would be different than mine. So 
there are human characteristics that are uniquely you.
    We all know that passwords are inadequate to serve these 
concerns. These comments, and the inadequacy of passwords have 
been expressed by everybody, including the President of the 
United States. We need to move forward to new technologies.
    And with that, I would like to proceed with my 
demonstration. [See Exhibit B on pages 45 and 46].
    For the demonstration, I am just going to use a standard 
Apple device, and on the device is a series of applications. 
The application I am going to choose is a banking application, 
but it could be anything. The menu presents me with options. In 
this case, I am going to select a second option, which is a 
transfer of funds.
    I will transfer funds between a savings account and a 
checking account, and I am going to choose to transfer a 
substantial portion of funds. Let us say I am going to transfer 
$15,000 to my son for his college tuition, so I select 
``transfer.'' It is asking me to confirm that transaction. I 
choose to confirm the transaction, and the system, based on the 
policy, is asking me first for a PIN, so I enter my PIN. It is 
now saying that the transaction is of some consequence to me, 
and what I would like to do is verify that you really are who 
you claim to be as opposed to just something I know.
    It is asking me to take a photograph, which I will do. 
There could be jokes about that. I am sorry you are laughing at 
my imagery, but I am submitting the photograph. And again, 
because of the considerations of the sum of monies involved, it 
is asking me to speak a phrase. I am going to speak this 
phrase. My identity is secure because my voice is my passport. 
Verify me.
    And what it is doing is taking all those identity 
attributes, it is encrypting them, it is sending them off to 
the server, it is matching them against an enrollment record, 
it is verifying mathematically that it is me in each of those 
attributes. My face, my voice, the PIN, the crypto keys on the 
phone match the enrolled identity. It is confirming the 
transaction, and it is establishing online trust. That would be 
the consumer experience. These are the technologies being 
rolled out by banks as we speak. And you will see them adopted 
in other industries.
    Now there is another important role associated with this 
technology, and that is of a regulator or an operator. I am 
going to select a different application, and this would be a 
command center. So this would be the back-end technology.
    ``My identity is secure because my voice is my passport. 
Verify me.''
    That would be the verification I just went through. And so, 
you would have a forensic audit trail of each and every 
transaction. And on the top half of your screen, you see a 
variety of transfers for each transaction or identity event I 
ever undertook. I would be able to verify the biometrics 
associated with those identity events, including my face, my 
voice. And I would also be able to see other information on the 
transaction, including the location of the transaction and 
where it occurred. In this case, for the back-end operator, to 
save time in this hearing, this transaction was performed 
earlier this week and we just took the screen images of it, so 
that actually did not go into the back end of the system.
    The design of the system is to take a tool that consumers 
have, love, use, very convenient, and couple that with powerful 
technologies designed to establish trust between an identity 
event online and the individual doing it, and then to use the 
back-end command center allowing a regulator to investigate any 
transaction they wanted.
    Thank you very much.
    [The prepared statement of Mr. Grissen follows:]

    Prepared Statement of Tom Grissen, Chief Executive Officer, Daon
    Thank you, Chair McCaskill, Ranking Member Heller, and members of 
the Subcommittee, for giving me the opportunity to testify today on 
this important topic. My name is Tom Grissen and I am the CEO of Daon, 
a leading provider of identity assurance, identification and 
verification software services worldwide. Our customers include the 
Departments of Commerce and Homeland Security, two of the largest 
American banks and many other large, private corporations, most of our 
Nation's airports and maritime ports, the EU, Japan, Australia and many 
other countries around the world.
    I will argue that the tools we have been relying on to address 
cyber security are inadequate. I hope to persuade you that there is a 
new kind of solution that will fix the broken trust model of the 
Internet. As we speak, these technologies are being deployed across 
some of the most sophisticated financial institutions in the world.
    Over the next five minutes of my testimony a drama will be playing 
out across the Internet. Hundreds of millions of Internet transactions 
will occur touching nearly every aspect of one's life.
    We will demonstrate the relevance of new technology through obvious 
applications in banking. At the same time the technology can be applied 
in ways that one can scarcely imagine across industries such as health 
care, social networking and online gaming.
    The crux of the problem across all these industries is that we 
cannot effectively identify the individuals with whom we interact 
    We have all enjoyed the eye opening experiences of the Internet. We 
all went online to browse websites and found innovative companies such 
as Netscape. Then we found the wonderful advancements in search and 
benefited from great companies such as Google. Next we placed our 
digital lifestyle on the Internet through companies such as Facebook 
who tapped into our desire to SHARE. What is missing is an effective 
means of establishing online trust. Technologies similar to what you 
will see today address this daunting problem.
    The inadequacy of the tools to establish online trust is understood 
by everyone, including the President of the United States. In the 
current online environment, individuals are asked to maintain dozens of 
different usernames and passwords, one for each website with which they 
interact. Passwords have served us well, but were invented in the 
1960s. The complexity of this approach is a burden to individuals and 
encourages bad behavior--like the reuse of passwords--that makes online 
fraud and identity theft easier. Challenge response technologies are 
being defeated by social engineering. They all depend on ``what someone 
knows'' rather than ``who you are.''
    Daon develops software that binds the person to the event through 
the use of factors, including biometrics. Biometrics are simply human 
characteristics that are uniquely you, such as your voice, face, palm, 
fingerprint, etc.
    Using your smart phones, PCs or tablets, these software 
technologies empower you to securely establish your identity through a 
combination of encryption, PIN/passphrase entry, location-based 
technology, and biometrics such as voice, face and palm image matching. 
These technologies are a fully mobile, private and cost effective 
solution based on technology (e.g., smart phones) that consumer's use 
and enjoy.
    I am neither a proponent nor an opponent of Internet gambling. 
However, there are many parallels between Internet gambling and what 
Daon does for our clients in terms of the trust relationships with 
customers and the governmental oversight of various activities (e.g., 
financial services). Over the past two years we have been monitoring 
the development of this issue before Congress. Absent congressional 
action or a uniform set of national standards for this particular 
Internet activity, various states have authorized various forms of 
Internet gambling. We have watched as states such as Illinois, Nevada, 
New Jersey and Delaware have either rolled out or are preparing to roll 
out Internet gambling with different kinds of standards for age 
verification, location verification and fraud prevention.
    I am thoroughly convinced, particularly in the wake of the December 
2011 Justice Department decision about the inapplicability of the 
Federal Wire Act to most forms of Internet gambling, that continued 
congressional inaction on this issue is not acceptable.
    The risks associated with Internet gambling--and in particular, 
Internet gambling that is either unregulated or insufficiently 
regulated--are well-appreciated. These include:

   Gambling by minors;

   Defrauding of consumers by site operators;

   Defrauding of players by other players;

   Money laundering by either operators or players;

   Violations of jurisdictional restrictions or prohibitions;

   Breaches of data confidentiality and other security 
        failures; and,

   Problem or excessive gambling.

    Despite the recent indictments of several prominent offshore poker 
operators, no one can seriously challenge the fact that Americans, 
young and old, are finding ways to gamble on illegal offshore sites--
some estimates put the markets at several billion dollars. But illegal 
offshore sites are only part of the problem, as the states, in the wake 
of the DOJ decision, are pursuing their own Internet gambling ventures. 
For example, the Illinois Lottery has been selling tickets online since 
March 2012. Georgia has sold lottery tickets online since November 
2012. Legal online poker has taken place in Nevada since April 2013. 
Delaware has approved Internet casino-style gambling and its system is 
expected to be operational by October. My understanding is that 
Internet gambling of all kinds will go live in New Jersey this 
    There are many other states weighing proposals of one kind or 
another to legalize Internet gambling (See Exhibit A for a discussion 
of Internet gambling legalization across the U.S.). While all of these 
states have some standards to deal with identifying customers and other 
regulatory issues, both the existing Internet gambling states and the 
prospective Internet gambling states share one common attribute: in no 
jurisdiction is state-of-the-art ``Know Your Customer'' technology in 
place or required to adequately mitigate the risks of Internet 
gambling. In other words, no one has technological requirements in 
place to ensure that a minor is not playing on a stolen parent's credit 
card and PIN; that it's a human being you're playing against, not a 
robot; or that a player is actually physically located in a 
jurisdiction that permits Internet gambling.
    Satisfying these requirements means employing systems already in 
place for many sensitive e-commerce and security applications. Exhibit 
B provides screen shots demonstrating how the systems work.
    As the Internet by its very nature transcends intrastate commerce 
and is truly interstate, establishing our nation's policies on Internet 
gambling is the responsibility of the Congress. Whether the policy is 
prohibition, limitations or some combination, is your choice. But, 
given the current proliferation in the states, I believe that one 
appropriate role for the Congress--and I believe the time is ripe for 
Congress to exercise this role--would be to set certain strict, minimum 
standards for identity assurance, identification, and verification for 
Internet gambling should the states be permitted to offer it in the 
first place. Nothing in the track record thus far suggests that states 
will apply such standards of their own volition, and it's time Congress 
stepped up to the plate.
    Thank you again for the opportunity to testify and I look forward 
to your questions.

    Senator McCaskill. Thank you. It is fascinating, but 
clearly this has not been adapted mainstream yet. I am not 
aware of anywhere that I do business that this technology is 
    So, the first question that comes to mind is, let us assume 
that there are online gaming entities that are identified and 
by state gaming authorities or, if we do Federal regulations, 
Federal gaming authorities. Is it your testimony that what we 
do is require that the only way you could do online gaming 
would be if, A, the online gaming entity had this technology, 
and, B, the people who wanted to play poker online would have 
to have an iPad that could take their picture and listen to 
their voice, or a computer that would do that?
    Mr. Grissen. Sure, two great questions. The first question 
is related to the awareness of it, the technology is in the 
marketplace. As we speak, it is being rolled out by banks. It 
is being distributed in consumer security marketplaces in 15 
countries around the world, 17 languages. It is part of the 
NIST program with the Department of Commerce, the National 
Strategy for Trust Identities in Cyberspace.
    And the second part of the question is, would we require 
it. Biometrics are a very powerful tool, and it would be my 
recommendation that these types of technologies should be 
adopted as they are being adopted in other industries. And it 
does not require an iPad. It could be any device: Android, 
Apple, tablet, or smartphone. It would require a device with 
the capabilities to have a camera, which most do, have 
location-based capabilities within them, and a microphone.
    Senator McCaskill. Well, it certainly adds a new wrinkle to 
the gazillion people who have tweeted at me over the last 10 
days. I do not know how they are all going to feel about not 
being able to play online poker if they are not willing to take 
their picture every time they log in. And so, you are going to 
have some real friction between--because a lot of the people 
who want to play online poker are attracted to it because they 
do not want to do it in public. They do want to go to a brick 
and mortar place either for the convenience or for the privacy.
    So it is a fascinating--you know, obviously I am respectful 
of the technology, but the question is, it creates a real 
friction between those people who want privacy in this age that 
we are talking about, big data, and we are talking about NSA 
capabilities, and we are talking about what people know about 
you based on what you click, or whether you have GPS on. It is 
fascinating that we would open a whole new treasure trove of 
data. And I trust that you say that it is encrypted.
    But do any of the three of you have a comment on this as to 
whether or not you think this technology would alleviate some 
of the concerns that you have expressed about online gaming, 
particularly as it relates to the people that will flock to 
this in order to make a quick dollar, and then switch an ID 
    Mr. Blum. I think that identifying who the customer is is 
very important. It is part of money laundering rolls. But the 
reason you have to know your customer regulations in the 
banking system is to be able to figure out whether the 
transactions that are going forward are appropriate or not. And 
this does not begin to address that kind of question.
    So a bank wants to know who you work for, what are your 
usual deposits, what kind of usual activity goes on in your 
account. This would tell you, yes, that is the guy, but it will 
not tell you anything about how that account might be used or 
what is an appropriate level of use. So if someone wants to put 
$10,000 or $20,000 or $50,000 on account with a casino, how do 
we know that that person is an appropriate person to be putting 
it there? And how do we know that they are going to gamble it 
and not move it around to some other location?
    I do not think that this solves that problem. You really 
need an anti-money laundering regime in the casino to make it 
    Senator McCaskill. Anybody else? Senator Heller?
    Senator Heller. Thank you. A few years ago--actually, more 
than a few years ago when I was Secretary of State, I got a 
phone call from a colleague of mine on the East Coast, another 
secretary of state. And the purpose of that phone call was to 
tell me that his son had left for college, and that he got onto 
a website for gambling and had gambled away his tuition. And 
you can imagine the parent was not happy about this, less happy 
about the fact that when he pulled up the website it said ``Las 
Vegas'' on it. And it was not a Las Vegas website. They just 
knew if you put ``Las Vegas'' on the site, that that would be 
more attractive, but it was an offshore site.
    This parent, I sent them to the Gaming Control Board, and 
how that ended up at the end of the day I really do not know. 
But I doubt that it worked out as well as he would have hoped 
that it would have worked out.
    And I am sure that for those sitting on this panel and 
those who were serving in Congress at the time, this was not a 
rare phone call. I am sure that many parents had the same 
problem, same issues, and for that reason, Congress made 
certain steps, certain procedures, to make--to bring this to an 
end. And I think UIGEA is one of those fixes, and it would have 
made sense, especially in this case, where it was prior to this 
action taking place, that they could monitor these transactions 
through financial institutions, and be able to bring it to a 
halt from unusual transactions that occur in these accounts.
    And the reason we are here today is--and I emphasized this 
in my opening remarks, but I continue to want to reemphasize 
this--is that on December 23, 2011, the Administration changed 
all this, changed it all. And the reason that the 
Administration changed this was so that their friends in 
Illinois and New York could put their lottery tickets on line. 
So unilaterally, the White House made a decision 2 days before 
Christmas when all of us were out of town, not calling a single 
Member of Congress, said we are going to change the way we do 
business here in this country, and we are going to exempt 
Internet gaming, and we are going to say that it only pertains 
to sports betting. And that is why we are here having this 
discussion, this meeting here today.
    As I mentioned, five states now have approved it for their 
states. Twenty states are looking at it now in how to move 
forward on what may be this new source of revenue. And here is 
my concern. I have an iPad here in front of me, and I have a 
gambling site on it. And this is what is going to happen a few 
years down the road.
    Some parent is going to see their 14-year-old child on an 
iPad, and they are going to be gambling. That child is going to 
be gambling. And they are going to say, wait a minute, what 
just happened? They have no idea that this is coming down the 
road because it is going to be so difficult to determine who 
that person is, what age they are, and where they are. They are 
not going to be able to handle that.
    And because of the actions of this White House is why we 
are where we are today for what I define as friends making--
helping friends and making sure that some of these states could 
put their lottery tickets online. And it concerns me.
    I want to thank all the witnesses here for taking time, and 
it was very, very helpful.
    I want to start with you, Mr. Canterbury. And taking a look 
at what we are doing and what we are trying to define here, 
what actions does this Congress need to take? What do we need 
to reverse? Is there something beyond just reversing the 
actions of the White House, or is there more that we can do to 
assist you and your organization, making sure that we can stop 
children and perhaps problem gamblers from getting caught up in 
this web?
    Mr. Canterbury. Philosophically, with law enforcement, 
obviously we are always behind the eight ball on the 
technology, especially at the state and local level. It will 
take us years to get to the place that we need to be 
technologically to fight any kind of money laundering at a 
state level that progresses, especially when it is cross-border 
money laundering. State and local law enforcement just will not 
have the resources to do it.
    The interpretation by the Justice Department obviously does 
not concur with what we felt Congress passed prior, so we 
believe that there does need to be a congressional fix. And, 
you know, the FOP has not taken a position pro-gambling or 
anti-gambling. I mean, anything that generates revenue for 
state and local government, I am for it because that is where 
all of my members get their paychecks. So we are very concerned 
about the revenue aspect. But we also know that the terrorist 
groups have been using any kind of Internet sales, not just 
gambling, to try to launder money.
    So anything that Congress can do, and obviously we stand 
ready to work with the Senate to develop that technology. But 
philosophically, the fix would help us immediately. The 
technology that we have seen here today, I am not sure, as Mr. 
Blum said, that it would prevent the money laundering, but it 
does help with respect to underage gambling and troubled 
gaming, because almost every crime that you see associated with 
gambling is associated with the debt.
    Senator Heller. Mr. Grissen, do you monitor every atate? If 
there are five states out there right now that have approved 
Internet gambling, there are 20 states that are looking at it. 
Have any of them submitted any legislation that would create 
the protections that you just shared with us? I mean, are they 
looking at this technology and trying to protect the most 
    Mr. Grissen. I am not an expert in online gambling or 
Internet gambling. To my knowledge, there are no states that 
    Senator Heller. No states have contacted you?
    Mr. Grissen. No. I believe that if they had the similar 
level of interest in this committee and technology ion looking 
at these things, that they would. I think there is a reluctance 
to move first.
    In contrast, banking is using it to create differentiators 
and provide an enhanced trusted service with our customers. So 
I think it is somewhere in an adoption curve, but I have not 
seen any overtures to try and look aggressively at this 
    Senator Heller [presiding]. OK. I will save my questions as 
we get through the panel here. But, Senator Blunt?
    Senator Blunt. Thanks, Senator Heller, and thank you for 
your leadership on this. I would say to Mr. Canterbury that, 
you know, the interpretation that Justice made of the Wire Act 
certainly was not what we anticipated or had been the 
interpretation when the 2006 Act was passed. And that decision 
either totally and forever more changes the playing field on 
these issues, or Congress now has to go back as legislation 
could, and hopefully will do, and look at what we need to do 
now, based with this new interpretation of what the Wire Act 
    Mr. Canterbury, what is your sense of how important it is 
that there be one legal standard here as opposed to state by 
state or community by community standards?
    Mr. Canterbury. I think it is important to have one Federal 
standard because you have 50 different State laws associated 
with gaming. For instance, in in my state, they are still 
arguing on legalizing raffles for churches, you know. There is 
very little. Our state lottery is the only thing that we have 
besides a little bit of charitable bingo.
    And I know that there are absolutely no laws in South 
Carolina that would cover anything involving the Internet or 
the gaming industry on the Internet. So I believe it needs to 
be uniform. Law enforcement will not be able to attack money 
laundering and terrorist activity using these funds with 50 
laws. There needs to be one, and I think it needs to be enacted 
so that it will work well with the state laws. But I think it 
is going to have to be a Federal standard.
    Senator Blunt. Yes. Mr. Smith, from your testimony, my 
impression was that you do not think there could be a worse 
position than we are in right now, that this current regulatory 
position is the worst possible place to be.
    Mr. Smith. That is correct, Senator. And, you know, it is 
not the first time that Congress has heard about this. You have 
got the National Gambling Impact Study Commission report from 
1999 where you had the state--the National Association of 
Trained Generals, keying off of what Chuck just said. We were 
talking about having a Federal standard.
    The Attorney General at the time when Florida was 
mentioned, ``State law prohibits an individual in Florida from 
placing a bet or wager by wire communication or by use of the 
Internet. However, the burgeoning of the Internet and the 
difficulty in adopting and implementing durable and effective 
enforcement mechanism makes any effort to regulate Internet's 
use better suited to Federal legislation rather than a 
patchwork attempt by individual states.'' And he said that in 
    And so, this new interpretation of the Wire Act that was a 
Christmas present from the Administration just sets us back.
    Senator Blunt. Right. Mr. Blum, I had a Children's Hospital 
meeting that I needed to step into, so I did not get to hear 
your testimony. It is available to us, and I have some sense of 
what was in it. But on money laundering, I mean, your sense 
would be, what, that the more outside unregulated contacts 
there are, the more you create vulnerability to both your money 
that you have and money that other people have that they want 
to send somewhere?
    Mr. Blum. The problem is you have got to know who owns the 
casino. You have got to know that the money coming into the 
casino is, in fact, gambling money, and that the profits of the 
casino are a disguised way of hiding proceeds of crime. So that 
means some kind of licensing for the casinos. It means an 
auditing of the casinos to see that what is going on somehow 
relates to the profit they are declaring, and that that money, 
in fact, is taxed, and the people who are in the gaming 
situation pay taxes. All of this is taken care of for the 
bricks and mortar institutions.
    The only way you can do that on the Internet is to have a 
uniform Federal standard and to have some Federal agency that 
takes on this tax. The current situation is absolute open 
season, and I do not see how you can get it under control. No 
individual state government, to my knowledge, has the 
resources, or for that matter, the interest in pursuing 
individuals who violate state law by gambling on the Internet. 
It seems to me that that is way beyond the enforcement capacity 
of any state government.
    Senator Blunt. And you believe that the Internet--this 
gambling on there is being used aggressively as a money 
laundering tool by people who have money that they have through 
illegal purposes?
    Mr. Blum. Absolutely. My feeling about it is that this is a 
tool that is being used by people who want to launder money. 
You would not have service providers offering essentially 
complete software packages to give you an online casino if 
somebody did not want to use the casino for nefarious purposes; 
that somebody in Bermuda says, hey, you want a casino? We have 
got three versions of it. You can set it up, put whatever name 
you want on it. And, by the way, it is going to be owned by a 
company that nobody can identify. To me, that is guaranteed 
trouble in the money laundering area.
    Senator Blunt. And you believe it is one of the top places 
people are laundering money right now?
    Mr. Blum. Absolutely. Absolutely. It has been for the 
longest time, and that is why it got regulated in the brick and 
mortar world.
    Senator Blunt. Right. Thank you, Mr. Heller.
    Senator Heller. Thank you. Senator Ayotte?


    Senator Ayotte. Thank you, Mr. Chairman. I want to thank 
the witnesses for being here. As I listen to this and I think 
about what the Attorney General did nearly 2 years ago where he 
rolled back 50 years of established law under the Wire Act 
basically with the stroke of a pen, what we have here is a free 
for all. I mean, this is a situation where we have got not only 
potential for money laundering, but let us be clear who can use 
this for money laundering. We can have organized crime do it, 
but we can also have terrorist organizations. Would that not be 
right, Mr. Canterbury?
    Mr. Canterbury. I do not think there is any doubt about 
that, Senator.
    Senator Ayotte. And then, I look at the other issues 
created by this, not only money laundering, but I thought it 
was very telling in your testimony about the use also for drugs 
to basically--drug dealers, some of the issues happening in 
Costa Rica. I mean, this is deeply troubling. All the work that 
the police are doing every day on illegal drug interdiction, 
and then this is--this becomes a whole free for all without 
some Federal regulation of this.
    And is this--we are already seeing this in terms of drug 
interdiction and the money laundering on that end?
    Mr. Canterbury. That and prostitution. The recent arrests 
in Mexico, for example, it was forcing people to haul in money 
and/or drugs. And obviously the hauling of the money is just 
as--or more important to them than the hauling of the drugs. 
So, yes, I think it is.
    Senator Ayotte. Right. So, people are being trafficked over 
this as well.
    Mr. Canterbury. Human trafficking is obviously part of 
    Senator Ayotte. So, just to be clear, this is having a real 
human impact on people, and we have not even gotten into the 
addiction yet that can be created by gambling, and particularly 
with no--how are we making sure that children are not doing 
this at this point? The story that Dean talked about with 
someone who gambled away their college tuition, this is 
probably replicated across the Nation. Can you comment on that, 
Mr. Canterbury and Mr. Smith?
    Mr. Canterbury. I think the only regulation now is when it 
says ``are you over 18?'' Yes.
    Senator Ayotte. Well, you know, my kids are pretty sharp. I 
do not think it would take them long to get around that at the 
age of five and eight, right?
    Mr. Canterbury. Yes.
    Mr. Smith. I will go younger than that. My 3-year-old is 
already pretty sharp on devices.
    Senator Ayotte. And let us not kid ourselves. Our kids are 
a lot more tech savvy than we are, right?
    Mr. Smith. Well, and you saw with, you know, you have the 
Lehigh University student who, you know, served 22 months in 
prison because he got in such debt from online gambling, he 
tried to rob a Wachovia.
    Senator Ayotte. Have you looked at the issue, Mr. Smith, in 
terms of gambling addiction, whether online gambling actually--
I could envision a scenario where it would be easier to become 
addicted to that because you can do it anywhere. And you do not 
have to be seen somewhere to do it. Have you looked at that 
piece of it?
    Mr. Smith. Yes, and actually there is a University of 
Buffalo research study into addiction, and they found that 
there is a problem of gambling among young people. And when 
there is an increase in gambling, there is reason to be 
concerned. And when you add access, it is not without gambling 
problems. And that goes to the pathological addiction issues.
    Senator Ayotte. So what happens to a state like mine where 
recently our State legislature made a policy decision that they 
did not want to expand gambling to have, for example, casinos 
in the state. And it was a bipartisan policy decision. I 
previously served as Attorney General of our state, so I dealt 
with these issues as well there.
    How could it be possible in the current scenario that even 
the policy decisions that states like South Carolina make or 
New Hampshire are respected under this scheme, because could 
not just their residents just go online and do anything? It is 
a free for all without even really even any regulation on age 
that is verifiable. Mr. Blum, can you comment on that?
    Mr. Blum. I think for a state to try to enforce any rules 
with respect to Internet gambling is really a stretch. First of 
all, just consider the resources, and the time, and the effort, 
and the impossibility of building a case that you could 
actually prosecute.
    States have a lot of law enforcement priorities. To go into 
this is really a big deal. And that is why it has to be 
regulated, and it has to be regulated at the Federal level.
    Senator Ayotte. Mr. Canterbury, you know, when I was AG, it 
was one of the areas that I know law enforcement did a lot of 
work in, but it was always a technological challenge. For 
example, Internet predators and fraud committed on the 
Internet, that was a challenge. So I can imagine with the 
technology challenges that law enforcement has on those types 
of cases that this really is beyond the reach of your average 
local law enforcement agency to be--if there were these types 
of crimes, money laundering is committed without Federal 
regulation of this. Would you agree?
    Mr. Canterbury. Absolutely. I mean, at the state and local 
level, crime is prioritized, you know. We are going to respond 
to armed robberies and burglaries much faster than we are going 
to respond to the call that there is a prostitute or my child 
gambled. I mean, there will be a response, but the ability of 
state and local law enforcement to go outside of their own 
jurisdiction to do anything when a child has gambled online in 
Myrtle Beach, where I am from, at a casino in Bermuda, there 
will be absolutely nothing that local law enforcement could do 
about that. That is why we believe it has to be dealt with at 
the Federal level.
    Senator Ayotte. Well, I appreciate all of you being here, 
and I want to thank the Chairman and the Ranking Member for 
having this hearing because shame on us if we do not get 
something done on this, because when I think about the 
possibility for money laundering, terrorism, drug trafficking, 
and the potential for children to get access and to use the 
Internet, as well as people to not deal with the addiction 
issue, I hope this is something that we move on very quickly. 
Thank you.
    Senator Heller. Thank you.
    Senator Pryor?

                 STATEMENT OF HON. MARK PRYOR, 
                   U.S. SENATOR FROM ARKANSAS

    Senator Pryor. Thank you, Mr. Chairman. I am just going to 
have a couple of questions. I think I will focus those on Mr. 
Smith, and then I'm going to get out of the way and let my 
other colleagues ask questions.
    Mr. Smith, you rightly point out that the Congress has the 
duty to protect our children, and I think we do as well. And I 
am a big supporter of the unlawful Internet Gambling 
Enforcement Act. And I would like to get your thoughts on 
anything that can be done, say, in the area of advertising 
that, you know, advertising geared toward children that you 
would like to see us address and how you think we can do that. 
And I would just like to get your thoughts on that.
    Mr. Smith. OK. Are you speaking specifically for the 
    Senator Pryor. Yes.
    Mr. Smith. That is a big challenge. Anybody that has played 
a game whether on an app, or on a desktop or laptop, or other 
hand-held device, you are constantly seeing the pop up ads 
target the various phones. And to my knowledge, there is no 
screening mechanism. If you are a parent and you have purchased 
your 15-year-old a cell phone to use for, you know, to pick him 
up from football practice or something, you are not going to be 
able to control, to my knowledge right now, those ads coming up 
encouraging them to play a casino game, and target them, and 
start getting them playing those games online through their 
    And the gaming industry is increasingly moving to the 
mobile devices, and there is no protections in place.
    Senator Pryor. I think that we all, and I heard Senator 
Ayotte a moment ago talk about children and, you know, just the 
concerns we have for children. I think age verification 
obviously is going to be a big challenge. It has been in other 
contexts on the Internet. And the easy availability of the 
access of Internet gaming is certainly a big concern that, you 
know, we have struggled with in the Subcommittee before in 
various contexts.
    And, you know, there are technology issues about should 
there be some sort of blocking mechanism for parents on various 
devices, whether it is desktop, laptop, tablet, cell phone, you 
know, whatever it may be. And, you know, we talk about those 
sometimes in this subcommittee or there is another subcommittee 
in Commerce that we sometimes talk about those things. But I 
think that just in general, we definitely have that concern, 
and I think I would like to just hear more from you and, you 
know, work with you on this as we go forward.
    And I want to thank--I am going to call you Chairman Heller 
today. You will be a chairman one of these days, and I just 
want to say I want to thank you for your leadership on this. I 
know this is something that is very important to you and 
Senator McCaskill as well. So thank you all for having this 
hearing, and, you know, I look forward to working with you on 
this issue as we go forward. Thank you.
    Senator Heller. Senator, thank you.
    Senator Blumenthal?


    Senator Blumenthal. Thank you, Chairman Heller. And I want 
to join--I want to thank and join in thanking you and Senator 
Pryor for having this hearing. I think there is a clear moral 
and economic imperative in acting to prevent the abuses and 
wrongdoing that clearly are in inherent, almost inescapable, in 
this form of gambling if we fail to take effective 
    And I am not sure in many areas whether they can be taken, 
not only because of the impact on children, but the potential 
dangers of fraud concerning adults, verifying means of payment, 
and making sure that payment is made. The resources that would 
be required for effective enforcement of preventive and 
protective measures are, in my view, staggering.
    But I want to focus on one danger that perhaps has not been 
explored. Online gambling involves potentially huge amounts of 
information and data from participants, does it not?
    Mr. Blum. Senator, if I may, that is a huge problem. If I 
were a Russian crook, I think I would open up a casino online 
and steal credit card information.
    Senator Blumenthal. Exactly.
    Mr. Blum. Go out of business a week later. Who is to catch 
    Senator Blumenthal. And you would use that credit card 
    Mr. Blum. Instantly.
    Senator Blumenthal.--however you might like.
    Mr. Blum. Exactly, very quickly.
    Senator Blumenthal. All kinds of collateral damage.
    Mr. Blum. Of course.
    Senator Blumenthal. And even with the best of intentions, 
even an honest online gambling operator, absorbing and 
accumulating huge amounts of information could potentially be 
the victim--``victim'' in very heavy quotes--of a theft of that 
data. Could it not happen that way?
    Mr. Blum. Absolutely.
    Senator Blumenthal. And do you know whether online gaming 
operators are taking any kind of measures against that kind of 
theft of their data or breach of their data? In other words, 
improper disclosure?
    Mr. Blum. I am sure there is a range among the people who 
are online operators. I am certain that the public companies or 
perhaps companies who have brick and mortar casinos and are 
regulated heavily in the states are far better at securing data 
than some of the other operators.
    But again, there is no uniformity of regulation, and no 
ability to really control people from outside the jurisdiction 
offering products which may be utterly insecure to people 
inside a given jurisdiction.
    Senator Blumenthal. Even the most established and trusted 
of institutions, whether our banks or state governments, have 
been subject to theft or breach of data.
    Mr. Blum. Absolutely.
    Senator Blumenthal. So the chances are highly likely that 
the more online gambling there is, the more such breaches and 
theft there is likely to be.
    Mr. Blum. The way you have to think about online casinos is 
that they are, for all practical purposes, banks. They are 
going to have accounts. Somebody opens an account. There is a 
way of putting money into the account. All of that information 
is going to be in the hands of the casino operator, and the 
money can be moved, moved from one account to another, moved 
back to the individual. It has to be able to be moved back to 
the individual. So, you really are looking at creating 
something in a regulatory scheme that resembles what we already 
do for banks.
    When the law was on the books, the Uniform Act, that 
controlled to some degree Internet gambling, it really used the 
banking system as a way of leveraging and controlling what 
these people did. So if I was an offshore guy, I could not use 
the banking system or credit cards to get money into my 
offshore accounts. When the law was undercut by that decision, 
the doors were opened, and now the banks simply process the 
money and let it all happen.
    I think you have to go back to using the banks as a lever 
and element of control. And you also have to regulate and 
control these offshore enterprises, or even the--in the various 
states, the Internet casinos.
    Senator Blumenthal. My time has expired, but I would be 
interested in another area, which is one that was mentioned 
earlier concerning human trafficking. I do not know whether you 
have instances of online gambling associated or involved with 
human trafficking or similar kinds of issues. If you could 
provide that information, I would appreciate it.
    Mr. Blum. Well, the biggest industry on the web is 
pornography, and the pornography is part and parcel of all of 
this problem of trafficking. And there is an awful lot of money 
that goes flowing through the system with respect to that--with 
respect to pornographic websites.
    I think that is an area that is worth exploring. I do not 
think any of these people are what we call the finest 
upstanding citizens of our respective states.
    Senator Blumenthal. And so, the two worlds merge, 
pornography and human trafficking.
    Mr. Blum. The same service provider I talked about in 
Bermuda that was offering casinos was offering online porn 
sites with all of the material. So, you know, it is take your 
pick. We will get money out of the country one way or another, 
and the way you do it is you just simply send the money 
offshore by sending it to this website, and suddenly it looks 
    Senator Blumenthal. Thank you. Thank you all for your 
excellent testimony today. Thank you.
    Senator Heller. Senator, thank you. I am going to do 
another quick round of questions. The Chairwoman is unable to 
return, so I will just have a few more questions here, and the 
hearing will be over.
    But I want to start with you, Mr. Blum. You did a pretty 
good job in your earlier testimony describing probably the 
history of gaming in Nevada. Prior to 1967 when Senator Laxalt 
was elected Governor, it was the Wild West. And it was the 
creation of the Gaming Control Board and the creation of 
actually allowing brick and mortar companies to incorporate 
that put them under the aegis of the SEC, FBI, that they could 
be monitored, which was necessary. And my concern is we are 
back to the Wild West now.
    Mr. Blum. You are absolutely right, Senator. And that 
regulation, the experience of Nevada, New Jersey, are pivotal 
in having people understand why this has to be regulated. You 
guys did it, and you know why you did it.
    Senator Heller. And by the way, New Jersey did a great job, 
    Mr. Blum. Yes.
    Senator Heller. I mean, they saw the concern, the problems, 
and their boards were set up also.
    Mr. Blum. And we have all been watching Boardwalk Empire, 
and we know the history of the people who originally wanted to 
control it in New Jersey.
    Senator Heller. Yes. I argued early on--in fact, we had a 
hearing about this on the Financial Services Committee when I 
was in the House, and Ways and Means Committee. And I always 
argued at that time that maybe a state like New Jersey or a 
state like Nevada ought to be doing the policing of this 
Internet effort. I do not think today that flies, but I thought 
that would have been two states anyway that were prepared. 
Other states are making headway, good headway--Mississippi, 
Missouri, and some others--in their control of their brick and 
mortar companies.
    But I am just concerned that we have found ourselves now 
back to where we were prior to 1967 in that we have a free for 
all now of what is going on with the Internet. And the question 
is, and this is why you are here, as we prepare legislation, we 
want your input so that we can make sure that we take care of 
those that are most vulnerable.
    Mr. Blum. I think it has to happen on the Federal level. It 
has to be sophisticated. It cannot be existing agencies. So, 
for example, people have suggested let IRS do it. IRS is deep 
in its own trouble, not enough people, supposed to be 
implementing the health care law. It just does not have the 
resources and the capacity.
    And the model I would see is some kind of Federal entity 
that does it, the finance by the people who seek licenses, and 
with expertise specific to this industry.
    Senator Heller. Yes. Well, I certainly do appreciate your 
testimony and the help it will be to formulate this piece of 
    I want to go to you, Mr. Grissen, and your presentation. 
Technology is ever changing. How do you keep in front of that? 
How do you keep a data breach--I mean, what keeps a person from 
having a picture of someone else in front of them and taking a 
picture of that off their iPad, sending it in? How do you stay 
in front of this, and how will it stop these data breaches?
    Mr. Grissen. Sure. Great questions. You asked earlier, how 
do I know who it is, what their age is, and ensure that it is 
not a minor impersonating the father because they found their 
password. I would invite any of the Committee members of their 
staff to actually try and impersonate me. I will give you my 
PIN, so you can act as if you were a minor or a fraudster. The 
software would deny access.
    So, the technology is very sophisticated. Obviously the 
cyber criminals continue to advance their efforts, our cyber 
legislation and efforts by Congress are important to bring 
forward the standards. It is important to be flexible in 
legislation to take advantage of new technologies and new 
    As to data breaches and security, it is important to design 
systems in a way that if your phone is lost, stolen, or 
compromised, that there is no identity information on it. That 
is the way proper technology is built. Encrypted using DOD type 
standards, so any personal information would not be available.
    NIST has done some really fascinating things as part of the 
Nation's strategy for trusted identifies in cyberspace to 
separate the identity information from the records. There is an 
anonymity that can be pulled together to establish online 
    Senator Heller. I believe there is a way to do this, and I 
think the technology is there. We can verify that individual. I 
just worry about the movement of technology, the advancements 
of technology, and their ability to overcome any system that 
may be there.
    Mr. Smith, I want to finish with you because I think you 
are the crux of the argument that we are having here, trying to 
help those children and those that are most vulnerable. And the 
concern is now you have states that are offering a lottery, 
instant cash prizes--instant cash prizes--on the Internet for 
lotteries, and the impact that clearly you see and most of us 
in the room see, the impact of that individual participating in 
that lottery, and the impact that that may or may not have, 
especially if you are a problem gambler, especially if you are 
too young.
    And I want to thank you for your testimony. If you have 
anything to add to what you have said up to this point. I just 
believe preventing these kind of problems is critical, and I 
think it is a priority of this Congress.
    Mr. Smith. Yes, I agree with you, and you said it well.
    Senator Heller. OK. I think that is the end. My time has 
run out for the second round. But I want to thank everybody 
here, and I wanted to thank everybody also here in this 
audience that has taken time. This is an important subject, and 
my--like the Chairwoman, my phone has rung off the hook about 
this particular issue, on both sides. As you can imagine, on 
both sides.
    But it is going to take witnesses like yourselves that is 
going to help us formulate this. And if my staff can stay in 
contact and continue to receive your expertise and opinion on 
these particular issues, I would certainly appreciate it. But 
again, I want to thank you for being here and taking time from 
your busy schedule to help update us and for giving your 
testimony to this Congress. Thank you very much.
    And with that, we will end this hearing.
    [Whereupon, at 11:42 a.m., the hearing was adjourned.]
                            A P P E N D I X

                       National Council on Problem Gambling
                                      Washington, DC, July 12, 2013
Hon. Claire McCaskill, Chair,
Hon. Dean Heller, Ranking Member,
Senate Committee on Commerce, Science, and Transportation,
Subcommittee on Consumer Protection, Product Safety, and Insurance,

Dear Senators McCaskill & Heller:

    Thank you for scheduling the hearing on the Expansion of Internet 
Gambling and Consumer Protection. In addition to our longstanding 
concerns about Internet gambling and addiction I urge that you consider 
the burgeoning issue of social casino gaming in your review. Social 
casino games are gambling games played on Facebook and other social 
networks, including web and mobile games, that do not require users to 
pay to play and/or don't provide prizes of value. These games are 
aggressively monetized and marketed yet completely unregulated. Common 
social gaming features, such as high frequency, duration & speed of 
play, frequent but variable rewards and big early wins are all strongly 
associated with gambling addiction. In short, some features that make 
social casino games so attractive are also potentially addictive.
    These games are the fastest growing segment of the gambling 
industry, with an estimated 170 million monthly average users and 
revenues of approximately $2 billion last year alone. Many of the most 
popular (and profitable) social casino games are operated by gambling 
companies. While we believe that the most social gaming is innocuous, 
our concerns center on three main areas:
    Underage Play--While Facebook has an age limit of 13, it is 
extremely difficult to enforce. The majority of social casino games, 
sites and apps we have examined have no age limits at all. In some 
cases the limits are in the terms and conditions but have no 
enforcement mechanism. In addition, play on these gambling-like sites 
may condition or habituate youth to gambling, making them more likely 
to engage in ``real money'' gambling and/or develop gambling problems. 
We know from decades of research that the earlier kids start to gamble 
the more likely they are to have problems. Pathological gamblers in 
treatment report on average they began gambling seriously for money at 
age 12. Also, many social gaming sites use animation and/or cartoon 
images that may appeal to younger users. The Chair of the U.K Gambling 
Commission reported earlier this year that nearly 600,000 young people 
claimed that they had either gambled or played free games online in 
Britain in the past week.
    Fairness--While social casino gambling sites use names, images and 
themes related to gambling, there are important but often hidden 
differences. One is that most sites use ``adaptive'' or ``reflexive'' 
algorithms and game mechanics designed to increase the time spent 
playing the game by modifying the results so that the longer you play 
the more likely you are to win. This obviously encourages play, but it 
may be problematic when users are also encouraged to pay for their 
chips or coins in order to progress within the game. It also may create 
erroneous expectations for winning that, when the user switches to 
``real money'' gambling--often hosted or operated by the same company--
that are extremely dangerous as the longer you play the more likely you 
are to lose since the odds are now against the user. There is little 
consumer protection or disclosure in general in this space. Social 
casino games are not regulated by either state gaming commissions or by 
hosts like Facebook or Internet service providers. While NCPG has 
proposed a voluntary code of conduct, no advertising or responsible 
gaming standards have been adopted by the industry.
    Gambling Addiction--The criteria for gambling addiction includes 
gambling with increasing amounts of money to achieve more excitement, 
attempts to cut back time and money spent, preoccupation, playing when 
feeling distressed (e.g., helpless, guilty, anxious, depressed) to 
relieve or escape these feelings. Most importantly, problem gamblers 
report that the action is the high they seek, it is the betting and 
amount of risk that is exciting and addicting, not how much they win or 
lose. Indeed, every study of Internet gambling addiction has found a 
higher rate of problem gamblers among those who gamble online. Even if 
social casino gamblers rate isn't elevated, the general public 
prevalence rate of 1 percent means that approximately 1.7 million 
monthly social casino users are likely to suffer from gambling 
addiction. At-risk gamblers and current problem gamblers may be 
attracted by or to social casino gaming.
    We have broader concerns about online gambling and consumer 
protection. For example, studies have found that some Internet casino 
sites provide inflated payout rates when gamblers play on the slot 
machine demo games. One published study found 40 percent of sites 
surveyed provided inflated payout rates (over 100 percent) in the demo 
session. But these unrealistic high rates were not maintained when 
playing for real money. In addition, some sites used marketing 
strategies reinforcing false beliefs about the notion of chance and 
randomness. None of the state Internet gambling regulations introduced 
to date fully incorporate our Internet Responsible Gambling Standards, 
a compilation of best practices from regulators around the world to 
help protect Internet gamblers. Nor has there been sufficient state 
funding for problem gambling programs--states and non-profits spend 
approximately $60 million per year to fight gambling addiction, 
approximately 1 percent of the $6 billion in annual social cost, and 
less than one-tenth of one percent of the 2012 legal gambling revenue 
of $95 billion. As a result, most states do not have adequate public 
health or consumer protection programs in place to address current 
gambling problems, let alone expanded Internet gambling.
    I attach a copy of my testimony at the most recent House hearing on 
Internet gambling that highlights these larger issues, including the 
lack of any Federal funds or staff for national programs or assistance 
to state health agencies to prevent and treat gambling addiction. Now 
that 48 states have some form of legalized gambling, and 75 percent of 
adults (and children aged 13-17) report having gambled in the past 
year, it is very timely to look at the broad public health and consumer 
protection aspects of this activity, especially as technology 
encourages and regulation allows gambling to flourish online and 
increasingly via social networks.
    The National Council on Problem Gambling is the national advocate 
for programs and services to assist problem gamblers and their 
families. NCPG does not take a position for or against legalized 
gambling. We were founded in 1972 and our 41-year history of 
independence and neutrality makes the National Council the most 
credible voice on gambling issues. The National Council has 37 state 
Affiliate chapters, including in Missouri and Nevada. NCPG is a 
501(c)(3) not-for-profit charitable corporation and does not accept any 
restrictions on contributions.
    The expansion of Internet gambling, including social casinos 
gambling, includes new risks for consumers, new responsibilities for 
state governments, regulators and operators, and possibly new 
opportunities for consumer protections. Please feel free to contact us 
with any questions.
                                               Keith Whyte,
                                                Executive Director.
    Response to Written Question Submitted by Hon. Amy Klobuchar to 
                            Chuck Canterbury
    Question. Enforcement of our laws, whether state or federal, is 
important to the protection of consumers and our national security. 
Your members enforce laws aimed at keeping consumers safe in interstate 
markets like gambling. Can you expand on how you work with law 
enforcement entities at various levels of government and across 
jurisdictions? Are there ways these relationships can be improved?
    Answer. I appreciate the opportunity to respond because this is an 
important question and it demonstrates the thrust of my testimony 
before the Subcommittee, which is that Congress must act to build a 
Federal regulatory framework to facilitate protections for our citizens 
and a means by which law enforcement can cooperate to shut down bad 
actors. Without such a framework, law enforcement agencies are unable 
to coordinate effectively.
    The first challenge law enforcement would have is to identify if 
there was a crime committed and, if so, in what jurisdiction the crime 
occurred. For example, if an Internet user places a bet or buys a 
product from his home in one state and money from his account is sent 
from an Internet server physically located in another state to an off-
shore operator who accepts the money and then disappears without 
placing or paying the wager or sending the product to the buyer, in 
which jurisdiction has the crime been committed? The state where the 
user placed an illegal sports bet? The jurisdiction from which the 
money transfer was authorized? Or did the crime occur offshore when the 
operator denied or withheld the payment or product? Right now, without 
any coherent Federal strategy in place, these questions have to be 
answered by local and state law enforcement agencies. It becomes a very 
real question of resource allocation: can the agency spare the manpower 
to sort this out and coordinate with other jurisdictions, perhaps 
including those overseas? I suspect in many cases, the answer to this 
will be no. State and local agencies must prioritize their resources to 
respond to crime which occur in their jurisdiction. Unless we are 
looking at a large scale money laundering operation and we have the 
full cooperation of Federal law enforcement agencies, I think it is 
doubtful in most cases that a smaller agency will be able to 
investigate a complaint like the one I have described.
    In cases where there is suspicion of large scale criminal activity, 
the Federal Government must be involved. Consider, for example, how the 
Federal Government was able to bring charges against 11 defendants 
under both the Unlawful Internet Gambling Enforcement Act (UIGEA) and 
the Illegal Gambling Business Act (IGBA). The latter statute was 
adopted by Congress in 1970 in an effort to attack the profits of 
organized crime. Apart from the individual making the wager, the 
statute allows any person that plays a role in the business or 
organization of conducting a gambling business to be charged with 
violating or conspiring to violate the Act. A key component to this 
law, however, is that there must be a State statute prohibiting the 
activity, which then would allow the Federal Government to investigate 
and prosecute the case. The indictments were brought using the State of 
New York, which defines gambling as taking place based on the location 
of the bettor. In other states, bettors may be able to call-in their 
wagers to an offshore bookmaker and not be in violation of state law, 
thus precluding the Federal Government from using the IGBA to go after 
these criminal enterprises. Obviously, this is not a very effective 
national strategy.
    Compounding this difficulty, several states have approved and many 
more states are actively considering proposals that would legalize 
various forms of Internet gambling, such as poker, lotteries, and 
casino games, all of which are no longer deemed unlawful by the Wire 
Act. Such state-authorized and promoted wagering, in conjunction with 
rampant gambling on offshore sites out of the reach of Federal and 
state prosecutors, will undoubtedly result in a dramatic increase in 
Internet gambling in the United States. Patchwork state and tribal 
regulations could also spark a regulatory race to the bottom without 
Federal standards and coordination with Federal law enforcement.
    I hope this answers our question fully and I want to assure you 
that the more than 330,000 members of the Fraternal Order of Police are 
eager to work with you and other Members of Congress to address this 
issue. If I can be of any further assistance or provide you with 
additional information, please do not hesitate to contact me or 
Executive Director Jim Pasco in my Washington office.
    Response to Written Question Submitted by Hon. Amy Klobuchar to 
                           Jack A. Blum, Esq.
    Question. The idea of expanding states' authority on Internet 
gambling raises concerns among some of the brick and mortar gaming 
operations. Can you discuss how you expect states to work with existing 
operations and how we can make sure that any discrimination or 
inconsistencies in rules or regulations are addressed?
    Answer. I do not believe that Internet gambling can be successfully 
regulated by the states. The states do not have the resources to 
develop agencies with the capacity to deal with the problem. Regulation 
has to come at the Federal level. If the brink and mortar facilities 
are regulated at the state level I assume the Federal regulator would 
coordinate with the state agencies. That would eliminate discrimination 
and inconsistencies.
    Response to Written Question Submitted by Hon. Kelly Ayotte to 
                            Chuck Canterbury
    Question. As you know, nearly 2 years ago the Department of Justice 
rolled back 50 years of established law by stating the Wire Act only 
applies to online sports betting. By limiting the scope of gaming 
operations enforceable under the Act, how has this affected your 
ability to crack down on illegal operations? When states are allowed to 
sanction various online gaming ventures within their borders, what 
additional challenges are faced by law enforcement? Does this make it 
easier or harder to protect consumers?
    If online gambling continues to expand freely into the states with 
no or limited Federal regulators, do you have any confidence in state 
agencies cracking down on malicious actors? Is it realistic to expect a 
state to slap the hand of one of its agencies which is raising millions 
of dollars in revenue each year? Would you expect it to be common play 
for regulators to look the other way on age verification and 
authentication? What is their incentive to strictly enforce the laws?
    As we address this issue, we must make sure there are meaningful 
regulations where states can opt out. We must make sure that we address 
child protections, addictions, anti-terrorist funding, money laundering 
and drug trafficking. I am concerned after Attorney General Holder 
upended the Wire Act and UGIEA, it made it easier for revenue-starved 
states to take advantage of citizens in other states. How do we make 
sure the integrity of the borders of New Hampshire are protected? Does 
a state-by-state approach make the most amount of sense? How do we 
maintain any control over payment systems?
    Answer. I appreciate the opportunity to respond because these are 
important questions which go to the heart of my testimony before the 
Subcommittee: It is Congress, not the states acting independently, that 
must act to build a Federal regulatory framework to facilitate 
protections for minors and other at-risk citizens, as well as a means 
by which law enforcement can shut down bad actors. States working 
without a national framework will be totally ineffective.
    Let me begin by stating that the Memorandum of Opinion issued by 
the Assistant U.S. Attorney General in the Office of Legal Policy in 
December 2011 was not the start of law enforcement problems related to 
Internet gambling. The Federal law has never caught up with the 
technology, so the existing ambiguities in the application of Federal 
laws, most prominently the Wire Act, to Internet gambling impeded law 
enforcement's ability to combat illegal activity at the Federal level. 
Existing gambling enforcement tools did lead to Federal indictments of 
several major Internet gambling operators in the spring and the fall of 
2011, but almost all of the charges were based on money laundering and 
bank fraud laws. None of these operators have been charged with 
offenses that directly dealt with Internet gambling activity that is 
offered by a myriad of offshore Internet sites to U.S. citizens. In 
fact, as I made clear in my testimony, the Federal charges brought 
against these defendants under the Illegal Gambling Business Act were 
dependent on state law.
    Every expert agrees that millions of Americans continue to gamble 
on the Internet even though such gambling is illegal, unregulated, and 
offers no consumer protections. Internet gambling is run by offshore 
operators, some of which operate from regulated foreign jurisdictions, 
but many of which operate from small Caribbean countries that do little 
to regulate the gambling and do nothing to protect consumers and 
minors. These operators also often offer online sports betting, as well 
as casino-banked games, such as slots and roulette.
    Prior to the opinion released by the U.S. Department of Justice, 
many states were considering legalizing and promoting intrastate 
Internet gambling to generate revenue. In the wake of the opinion, 
several states have approved and many more states are actively 
considering proposals that would legalize various forms of Internet 
gambling, such as poker, lotteries, and casino games. Such state-
authorized and state-promoted wagering, in conjunction with rampant 
gambling on offshore sites that are beyond the reach of Federal and 
State prosecutors, will undoubtedly result in a dramatic increase in 
Internet gambling in the United States. The FOP is concerned that, 
absent Federal standards, a patchwork of laws could result in a 
regulatory race to the bottom as states and sovereign tribes compete 
for gambling revenues.
    The law enforcement and consumer safety risks associated with 
Internet gambling, particularly unregulated foreign Internet gambling, 
are well-known and were well covered at the recent hearing. It is the 
position of the FOP that Congress must update the Wire Act of 1961, the 
Illegal Gambling Business Act of 1970, and the Unlawful Internet 
Gambling Enforcement Act of 2006 to ensure that they clearly apply to 
modern technologies and to all forms of prohibited Internet gambling. 
Legislation should strengthen enforcement by providing tools, such as a 
``good actors'' list, to crack down on unlicensed operators, thereby 
empowering law enforcement to work with financial institutions in 
shutting down and illegal activity, as well as stiffen penalties 
against illegal operators.
    On the issue of permitted Internet gambling, as I stated in my 
testimony, the FOP is not advocating for any expansion in defining what 
online gaming activity is deemed unlawful. This was the position we 
took when we supported UIGEA and it is the position we still hold.
    Response to Written Questions Submitted by Hon. Kelly Ayotte to 
                               Matt Smith
    Question 1. In your testimony, you indicate that state lotteries 
were given a gift when the Department of Justice reversed its long-
standing view that all Internet gambling was unlawful. In the Internet 
age, every smartphone could become a slot machine. Please expound on 
your testimony to explain your concerns about the explosion of Internet 
gambling which many contend is right around the corner.
    Answer. Senator Ayotte expressed concern about her children's 
ability to play games on mobile devices, a concern we share. It is our 
children that will be highly targeted by online Internet gambling 
proprietors. As I stated in my testimony, ``Ninety-three percent (93%) 
of teens age 12-17 utilize the Internet and 97 percent of teens of the 
same age participate in some form of online gaming making them 
attractive targets for gambling marketing as well as illegal and 
fraudulent operators.'' This makes Internet gambling not something 
containable to adults or inside state boundaries when anyone with a 
mobile device can travel with their own pocket casino. Everyday younger 
and younger children are being given devices on their parents' 
accounts. Cleaver marketers are going to find ways around safeguards 
and technology to reach the purchasing prowess of America's youth. And, 
as was discussed during the hearing, there is a very frightening 
possibility of human trafficking by international criminal enterprises 
who will once again engage in online gambling sites. We believe the 
state lotteries that pushed for the Department of Justice's memo out of 
a desire for sources of revenue are ignoring who will actually be 
marketed to and become the victims of the forthcoming expansion of on-
line gambling.

    Question 2. I recently read a statistic that approximately 2 
million Americans suffer from gambling problems and addictions and 
about 1 percent of the worldwide population (according to the National 
Council on Problem Gambling). With the prevalence of unregulated 
offshore sites, it would seem that the United States finds itself in 
the unfortunate position of incurring all the social costs of online 
gambling while having no control over the sites that serve U.S. 
citizens. In your capacity as President of the Catholic Advocate, can 
you talk about your experience working with those who suffer from 
    Answer. While directly working with those who suffer from 
addictions is outside our mission, we are concerned about the cost and 
impact on the family that comes with addiction as it relates to public 
policy. We believe experts in addiction science should be consulted 
about the consequences are part of this discussion. Gambling addiction 
affects personal relationships. Divorce, child abuse and suicide are 
all too common in homes where pathological gambling is present. One 
example in the United States, a report by the National Council on 
Problem Gambling mentioned in the question found approximately 20 
percent of pathological gamblers attempt suicide. The Council also said 
suicide rates among pathological gamblers are higher than any other 
addictive disorder. We are concerned, at the state level, there has 
been a short-sided examination about the true costs associated with 
expanding gambling into every home in America. The debates at the state 
level surround increased revenue from Internet gambling, but very few 
are expressing concern about the aftermath. As a result, when the true 
costs begin to reveal themselves down the road, every level of 
government will be burdened with increased spending on addition and 
other related social services programs.
    Response to Written Questions Submitted by Hon. Kelly Ayotte to 
                           Jack A. Blum, Esq.
    Question 1. The U.S. Treasury Department has several comprehensive 
international anti-money laundering programs that work 24/7, 365 days a 
year in an attempt to safeguard our international and domestic finance 
systems. Criminals from the beginning have laundered the proceeds of 
their illegal activity through a number of legitimate and illegitimate 
means. From my experience as Attorney General, I would argue that this 
is an area where state and local law enforcement need the Federal 
Government's assistance. First, do you agree with this, and second, are 
you concerned that unregulated offshore gambling sites may be used for 
money laundering purposes? In your estimation, what can Congress do to 
enhance our anti-money laundering capabilities?
    Answer. Money laundering controls have to operate at the Federal 
level to be effective. State law enforcement authorities have other 
priorities and concerns and lack the necessary resources. With 
exception of New York, most lack the jurisdiction and expertise to 
conduct a major money laundering investigation. New York is the 
exception because as a banking center most fund movements touch the New 
York banks and the New York Fed. Further, some states lack robust laws 
aimed at money laundering.
    I am quite concerned about unregulated offshore gaming sites being 
used as a vehicle for money laundering. A casino--offshore or onshore--
is very much like a bank. Customers have accounts. They deposit money 
to gamble, winnings and losses are either added to or taken from the 
account and the gambler can ask for the funds in the account to be 
returned. Of necessity the casino accounts will be encrypted. A casino 
controlled by gangsters could easily be used to move money either into 
or out of the country disguised a gambling fund or gambling winning. 
The corrupt casino operator could easily transfer funds from one 
account to another thus disguising the connection between the origin 
and the destination of the funds.
    All online casinos should be federally licensed and federally 
regulated. There should be severe penalties for U.S. persons gambling 
through unlicensed casinos. Banks and credit card companies should 
require a showing that the casino has a license before they can 
transmit funds to or from a casino. Finally all casinos are subject to 
the Bank Secrecy Act and the provisions of the Patriot act. They are 
obligated to identify their customers and screen transactions for 
suspicious activity. This obligation must be enforced either by gaming 
regulators or by the existing regulatory agencies.
    The two most important steps would be to increase funding for 
regulators and prosecutors and the push prosecutors to send revoke 
banking licenses when banks are caught in the act. At the moment the 
Justice Department uses ``deferred prosecution agreements'' to avoid 
threatening a bank's license.

    Question 2. Mr. Blum, when there are 50 jurisdictions instead of 1 
jurisdiction, how has this opened up the flood gates for corruption, 
money laundering and additional crime?
    Answer. Any crook seeking to avoid state prosecution will use 
multiple jurisdictions to run their operations. The casino's 
incorporation will be in one state, the server running the software in 
another, the operator and manager in a third and the banking 
relationships in a fourth or a fifth. Because there is little corporate 
transparency and because the practical problems of enforcing laws 
across state lines are immense, organized crime will have a field day.

    Question 3. What means do states have to monitor large scale 
laundering of capital by other countries, terrorist networks, or 
international crime syndicates?
    Answer. With the exception of New York, states are powerless to 
operate in the international arena. They lack the budget, the 
expertise, the ability to gather evidence and many cannot make use of 
the international mutual legal assistance agreements. For example, the 
Cayman Islands argue that its agreement with the U.S. is limited to the 
Federal Government.
    Response to Written Question Submitted by Hon. Kelly Ayotte to 
                           Thomas A. Grissen
    Question. As a former prosecutor and Attorney General, I have built 
a career enforcing our laws and going after those attempting to 
circumvent our rules. In your testimony, you argue that the tools we 
have in place are inadequate. I wholeheartedly agree. When Attorney 
General Holder opened the flood gates to online gambling, he made it 
infinitely more difficult to target corruption, money laundering and 
fraud. While I applaud your commitment to creating software that 
improves identity assurance and verification, what assurances can you 
give this committee that online verification is foolproof? Convenient 
stores claim they spend millions of dollars training their clerks to 
identify fraudulent actors. How would you compare the ability of your 
software to identify a fraudulent actor verse a person in a store? Is 
it easier to get around this verification online? What more needs to be 
done to verify age and geolocation online?
    The Federal Government faces serious enforcement challenges in this 
area. What assurances does a state which opposes Internet gambling have 
that sites licensed in other states will be 100 percent effective in 
preventing play by residents of states where online gambling is 
    Answer. Thank you for [your] thoughtful questions about the ability 
of state-of-the-art Ecommerce trust verification systems and technology 
to assure and verify identity. I am confident that the fuller 
description of these systems and technology provided below will leave 
[you] no doubt about the relative efficacy of Ecommerce solutions to 
customer identification versus those deployed in the convenience store 
    I describe below a generic online gambling customer identification 
solution based on current technologies employed in other sensitive 
Ecommerce sectors. The technology most certainly exists for such a 
system in the online gambling space, but as I indicated at the Hearing, 
I am unaware of any state using or requiring the technologies I 
describe that might be the underpinnings of any Federal standards 
regarding the responsible provision of Internet gambling.
Identity Verification and Internet Gambling
    Critical to an effective regulatory process that assures and 
verifies customer identity, are strict regulatory requirements 
mandating a series of rigorous player identification processes prior to 
establishing a new account to play and verifying identity at time of 
play (log-in). These regulatory requirements and processes would, 
beyond a doubt, offer much better safeguards against a number of 
customer identification risks (e.g., underage gambling) than exist in 
the brick and mortar industry, given the fact that the identities of 
adults can be validated through real-time automated crosschecks of 
existing databases and biometrics that are not utilized in brick and 
mortar gambling establishments.
    An acceptable solution would be a step-wise Know Your Customer 
protocol like the one described below that builds a profile of the 
prospective online gambling customer. That is, age verification, 
identity verification, geo-location and cross checking against 
databases of unwanted persons are components in an integrated process. 
Operators and regulators alike would then have a level of comfort that 
each prospective customer is who s/he say s/he is, is of legal age, is 
located in a jurisdiction where the activity is legal and is not 
otherwise barred from participation. Moreover, the system would provide 
the operator and regulator a full and complete audit trail addressing 
these issues as well as other issues focused on consumer protection, 
fraud prevention and compliance with anti-money laundering and other 
    Player Registration--The first step involves identifying a 
prospective customer's IP address and verifying that the customer is 
physically located in a jurisdiction that permits online gambling. 
Assuming that the customer's geo-location is verified and appropriate, 
an automated callback would be made to the landline telephone linked to 
the address provided by the customer during the registration process, 
using a reverse lookup of phone records. The customer is asked during 
the callback to input, on the telephone type pad, a verification number 
that is visible on the customer's computer screen. Successful 
completion of this process mitigates that the customer is residing at 
the address provided and that the person is indeed seeking to open the 
    If the process is successful, personal identification information 
provided by the customer is then cross-matched against various 
government-maintained databases of undesirable individuals. Individuals 
on such lists would not be permitted to open an account.
    A further step would leverage the ability to triangulate the 
location of a user's IP address with the location of a user's mobile 
device through a SMS (short messaging service--commonly known as a 
``text message'') coupled with ``global positioning technology'' (GPS). 
Using one of many technology providers, a SMS text is sent to the user. 
The user would then be required to click a confirmation link with their 
mobile device. In addition to triangulating the player's exact location 
to within five to ten meters, this step validates that the mobile 
number entered is indeed the number of the player. If the check is 
inconsistent with either the IP address information or other location 
data obtained from the player or if the player is located in a 
jurisdiction that does not authorize online gambling, registration will 
be suspended.
    In a well-regulated online gambling regime, all operators would be 
required to verify the identities, locations, and ages of their 
customers. Among other things, prospective customers would be required 
to provide data such as their name, address, date of birth, driver's 
license number, social security number and credit/debit card 
    Of course, if a prospective customer volunteers a date of birth 
indicating that the customer is underage, that customer would be barred 
from opening an account.
    If the date of birth provided does indicate a customer is ``of 
age'', then the operator of an online gambling service would use one or 
more independent data service companies (such as those currently in use 
to verify age and identity online for shipment of alcohol or tobacco) 
to test whether the name and address match the date of birth provided. 
These independent data service companies use a variety of specialized 
databases, (including credit data, driver's license and voter 
information) to cross-reference and verify the identity and age of the 
    A failure to verify either age or identity would mean that the 
customer may not open an account. The customer may, however, have the 
option of providing physical copies of identifying records (such as a 
driver's license or passport) for further review by the operator.
    I would add that in a well regulated environment, the use of a 
credit card alone for age verification would be prohibited as a source 
of verification, as the use of credit cards for age verification is a 
violation of most credit card company terms and conditions. Also, 
potential improper access to others' credit cards by minors prohibits 
this as an effective control.
    Even if a customer's age and identity successfully pass each of the 
steps above, the verification process does not end there. The social 
security number provided by the customer would be used to generate a 
list of personalized challenge questions (concerning, for example, 
previous cars registered, previous addresses, etc.), all of which the 
customer would have to answer correctly before an account is opened. 
Again, the goal is to ensure that the customer is who s/he says s/he is 
and of the age represented.
    After an operator has performed the challenge questions and 
confirmed that a person is who they say they are, at registration, each 
player will be mandated to register with biometric confirmation--facial 
and/or voice recognition, as I demonstrated in the Hearing. This 
requirement will preclude anyone from
    assuming someone else's identity on subsequent log ins; all but 
eliminating the issues some have raised with minors using their 
parents' or others' credit cards and also providing additional 
protections on fraudulent transactions by third parties.
    Only if all of these steps are successfully completed could the 
operator permit a customer to open an account in a well regulated 
    While identification of the customer when registering for play is 
accomplished by cross-matching government issued ID and other 
information customers supply using the specialized databases and 
biometrics described above, there are a number of additional tools 
available to operators and regulators. For example, a confirmation 
letter might be sent subsequent to the opening of an account to the 
address listed on government issued identification. This process would 
be similar to that used when a PIN number is changed with an airline, 
or bank, that serves as a notification that an account has been opened.
    Log-in--Verification of a player's identity would not end at the 
player/account registration process. On log-in, the player would either 
use voice recognition and/or facial recognition through their mobile 
device as part of the log-in process. This will not only accurately 
pinpoint the location of the player to within meters of their location 
(verifying whether a player is or is not in a jurisdiction that permits 
online poker play) but it will also assure that the player is the 
original player--the same adult--who created the account.
    Cash-out--Cash-out also provides an opportunity to verify a 
customer's identity. After a request by a customer to cash-out, the 
operator would send a request to the player's mobile device (separate 
and apart from their computer) in order to validate the player's 
identity either through voice or facial recognition. At the same time, 
through geo-location technology, the location of the player will be 
triangulated and this information is stored for full audit use by the 
operator and regulator. As an additional protection, players could also 
be required to submit a valid photo ID as well as proof of residency at 
the time of their 1st cash-out.
    The best strategy to achieve reliable and secure geo-location is a 
multi-pronged approach that incorporates data from various sources.
    Beginning with the user's first interaction with the system--
registration: personal information (name, driver's license #, address, 
phone #, etc.) is collected and stored, along with his/her IP address, 
and a ``Device ID'' for the computer (e.g., laptop).
    This data is then verified with a service that can score the 
identity's veracity and fraud profile (including age verification, 
address velocity calculation, connections to previous data used in 
fraud, etc. . .).
    IdentityX enrollment is also a part of this registration process, 
which begins collecting GPS information and the IP addresses used by 
the mobile device.
    All of this data is then used to determine the user's location at a 
given time. For example:

   The user's personal information scores highly for 
        legitimacy, and low for fraud.

   The user's IP address is used, in combination with personal 
        information, to estimate the user's location to an allowable 

   The user's GPS coordinates are consistent with the above 
        data and in the allowable area.

   User is then allowed access.

    Human reviewers can be employed only in cases where the system has 
flagged the user as having an unusually high risk/fraud profile and/or 
GPS and IP indicates the user is outside of bounds.
The Nexus Between Regulation and Technology
    It's important to remember that regulators control the thresholds 
for accepting, rejecting or requiring further information concerning 
customer identity verification, and can impose additional requirements 
that can further mitigate/eliminate relevant risks. Regulations can 
establish requirements based on the levels of assurance that are 
necessary to allow a customer to gamble, thereby fine-tuning the 
balance between failing to detect an underage individual and rejecting 
a player who is of the legal age. In other words, regulatory 
requirements can ``turn up the dial'' with respect to unknown or 
suspicious entrants to a site, which has the effect of minimizing the 
potential harm if a customer falls into a grey area. States should be 
free to establish policies and procedures that exceed mandated Federal 
standards and protections. By implementing a solution that embraces 
flexibility, through the union of complementary technologies, 
regulators are empowered to effectively tune this dial based on the 
needs of the public.
    I would like to thank Senator Ayotte for providing me the 
opportunity to elaborate on the nuts-and-bolts of the technologies and 
systems that I demonstrated at the hearing. I appreciate and share her 
concerns about the potential for fraud, corruption, and money 
laundering associated with unregulated or poorly regulated online 
gaming and other forms of Ecommerce. I am happy to answer any 
additional questions or otherwise provide assistance.