[Senate Hearing 113-84]
[From the U.S. Government Publishing Office]
THE EXPANSION OF INTERNET GAMBLING: ASSESSING CONSUMER PROTECTION
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, AND INSURANCE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
JULY 17, 2013
Printed for the use of the Committee on Commerce, Science, and
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED THIRTEENTH CONGRESS
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
SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY,
CLAIRE McCASKILL, Missouri, DEAN HELLER, Nevada, Ranking
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
THE EXPANSION OF INTERNET GAMBLING:
ASSESSING CONSUMER PROTECTION CONCERNS
WEDNESDAY, JULY 17, 2013
Subcommittee on Consumer Protection, Product
Safety, and Insurance,
Committee on Commerce, Science, and Transportation,
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.
OPENING STATEMENT OF HON. CLAIRE McCASKILL,
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-
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
STATEMENT OF HON. DEAN HELLER,
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
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?
STATEMENT OF HON. BRIAN 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.
STATEMENT OF CHUCK CANTERBURY, NATIONAL PRESIDENT, FRATERNAL
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
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
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
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.
STATEMENT OF MATT SMITH, PRESIDENT,
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
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.
[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
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
Senator McCaskill. Thank you, Mr. Smith.
We will now hear from Mr. Blum. Thank you very much for
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
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
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.
[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
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?
STATEMENT OF THOMAS A. GRISSEN,
CHIEF EXECUTIVE OFFICER, DAON
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
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.
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.
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,
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
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
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
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
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
Senator Blunt. Right. Thank you, Mr. Heller.
Senator Heller. Thank you. Senator Ayotte?
STATEMENT OF HON. KELLY AYOTTE,
U.S. SENATOR FROM NEW HAMPSHIRE
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
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
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.
Senator Heller. Thank you.
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
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.
STATEMENT OF HON. RICHARD BLUMENTHAL,
U.S. SENATOR FROM CONNECTICUT
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,
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
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
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
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.
Response to Written Question Submitted by Hon. Amy Klobuchar to
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
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
Response to Written Question Submitted by Hon. Kelly Ayotte to
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
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-
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
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
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.