[Senate Report 108-173]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 346
108th Congress                                                   Report
                                 SENATE
 1st Session                                                    108-173

======================================================================
 
               INTERNET GAMBLING FUNDING PROHIBITION ACT

                                _______
                                

                October 27, 2003.--Ordered to be printed

                                _______
                                

Mr. Shelby, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                   [To accompany S. 627, as amended]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Banking, Housing, and Urban Affairs, to 
which was referred the bill, S. 627, having considered the 
same, reports favorably thereon with an amendment in the nature 
of a substitute and recommends that the bill (as amended) do 
pass.

                              Introduction

    On July 31, 2003, the Senate Committee on Banking, Housing, 
and Urban Affairs considered S. 627, entitled ``The Unlawful 
Internet Gambling Prohibition Act of 2003,'' a bill to prohibit 
the acceptance of any bank instrument for unlawful Internet 
gambling. The Committee voted 21-0 to report the bill, as 
amended by a managers' amendment that was adopted by voice 
vote, to the Senate for consideration.

                       Purpose of the Legislation

    Internet gambling web sites allow users of personal 
computers and other Internet access devices to place bets from 
their homes or offices (or from any place at which Internet 
access can be obtained). Such web sites permit betting on 
sporting events of all kinds and can produce a virtual form of 
any casino game. They thus make possible immediate, 24-hour 
access to the full range of wagering opportunities. Anyone, 
anywhere, can bet at any hour on sporting events and casino 
games. Bets can be made from any computer or Internet-ready 
hand-held device. A potential gambler simply logs on to the web 
site, uses a credit card or similar payment device to open and 
fund an account, and is then permitted to gamble all or any 
part of the account (the initial fund, plus gains, minus 
losses).\1\
---------------------------------------------------------------------------
    \1\ See generally, General Accounting Office, Internet Gambling, An 
Overview of the Issues (GAO-03-89, December 2002) (the ``GAO Study'').
---------------------------------------------------------------------------
    There are estimated to be between 1,500-1,800 Internet 
gambling web sites, virtually all of which operate from 
computer servers located in the Caribbean and other 
jurisdictions outside of the United States in which Internet 
gambling has been legalized.\2\ (In the United States, only 
Nevada has enacted legislation that could permit Internet 
gambling.) Total 2003 operator revenues from Internet gambling 
are projected to run at least $4 billion, 50 to 70 percent of 
which will come from wagering from within the United States, 
despite the fact that no state currently permits Internet 
gambling and only one state, Nevada, permits any general sports 
betting at all.\3\
---------------------------------------------------------------------------
    \2\ H.R. Rept. 107-339, 107th Cong., 2nd Sess. at 6 (2002)(1,500 
sites); Wall Street Journal, ``Internet Casinos Lose Allies, 
Threatening Winning Streak'' (November 26, 2002, p. B-1)(1,800 sites, 
``mostly based in the Caribbean.''). Internet gambling has been 
legalized in at least 50 countries, primarily in Europe and the 
Caribbean.
    \3\ Compare GAO Study at 6 (50-70 per cent from within the U.S.) 
with Wall Street Journal, supra ($4.2 billion, 60 per cent from within 
the U.S.). Industry analysts now believe that most additional growth 
will come from betting outside the United States.
---------------------------------------------------------------------------
    Its opponents argue that Internet gambling is especially 
dangerous, because it can foster or enhance gambling addiction, 
provides no assurances against rigged games, and offers 
enhanced opportunities for money laundering. In addition, of 
course, Internet gambling diverts revenue--and taxes--from 
lawfully authorized gaming within the United States and permits 
greatly expanded gambling by U.S. individuals on sporting 
events.
    The Internet provides anonymity to the user and thus raises 
the possibility that minors could participate in gambling. 
Children are the most computer literate segment of our society 
and can find these sites with ease. Unfortunately, they are 
also the most susceptible to gambling's addictive powers. A 
study conducted by the Harvard School of Medicine, whose 
findings were published in the September 1999 issue of the 
American Journal of Public Health, estimates that nearly 6 
percent of American children under the age of 18, or more than 
one million teenagers, have a serious gambling problem. The 
Harvard study's findings are consistent with other studies that 
found that 30 percent of New Jersey high school students 
surveyed admitted to gambling at least twice a week, and 90 
percent admitted to betting at least once a year.
    In June 2002, Federal Trade Commission (FTC) Chairman 
Timothy J. Muris announced the results of an informal survey of 
websites to determine the access and exposure teens have to 
online gambling. The FTC visited over 100 popular gambling 
websites and found that minors can, indeed, access these sites 
easily. FTC staff found that the gambling sites had inadequate 
or hard-to-find warnings about underage gambling prohibitions, 
and that some 20 percent had no warnings at all. The survey 
also found that these gambling sites had no effective mechanism 
to block minors from entering.
    The National Collegiate Athletic Association (NCAA) reports 
that many college students lose thousands of dollars on gaming 
sites--often using their parents' credit cards. Young people 
use the Internet more than any other age group. The NCAA has 
also voiced its concern over the problem of Internet sports 
gambling among college students. William S. Saum, Director of 
Agent, Gambling and Amateurism Activities for the NCAA, 
testified: ``This is a matter of great importance to the more 
than 1,000 colleges and universities that are members of the 
NCAA and to the hundreds of thousands of student-athletes who 
participate in intercollegiate athletics annually.'' Saum 
called for strong legislation to prohibit gambling over the 
Internet.
    The same anonymity concerns make real the risk that 
Internet gambling can increase problems of gambling abuse and 
addiction. For 15 million Americans with gambling problems, 
gambling is every bit as addictive as alcohol or illegal drugs 
can be. Recovering from a gambling problem is a lifelong 
struggle. Internet access tilts the playing field against the 
addict, by making gambling easily accessible in the comfort and 
privacy of the home. And, in so doing, Internet gaming removes 
the impediment of traveling to a casino or track, and shields 
the problem gambler from the public stigma that may help the 
addict to refrain. Gambling is not a harmless vice or 
victimless crime. According to the National Academy of 
Sciences, ``pathological gamblers engage in destructive 
behaviors: they commit crimes, they run up large debts, they 
damage relationships with family and friends, and they kill 
themselves.'' The fall-out of problem gambling--domestic 
violence, theft, burglary, foreclosure, bankruptcy and 
suicides--is as devastating to family and friends as it is to 
the gambler himself.
    Finally, Internet gambling raises money laundering 
concerns. Law enforcement officials point to the fact that many 
Internet gambling sites are located off-shore and the relative 
ease of using the Internet for international transactions. The 
operation of Internet gambling operations offshore also limits 
significantly the protection against rigged games at which 
traditional gambling regulation is aimed. In a March 2002 
report, a State Department International Narcotics Control 
Strategy Report noted Internet gambling using credit cards and 
offshore banks as a vehicle for money laundering and tax 
evasion.
    Congressional efforts against Internet gambling began in 
1995 and gathered steam following the 1999 recommendation of 
the Congressionally-created National Gambling Impact Study 
Commission (NGISC) that the federal government bar both 
Internet gambling and the collection of credit card debt 
incurred in the course of Internet gambling. The NGISC 
evaluated the impact of technology on gambling in the United 
States and recommended the passage of legislation prohibiting 
wire transfers to known Internet gambling sites, or the banks 
that represent them.
    Since the Commission's 1999 study, off-shore Internet 
casinos have continued to proliferate and illegal Internet 
gambling continues unabated. As Senator Jon Kyl testified 
before the Committee: ``When I first proposed a ban in late 
1995, there were roughly two dozen gaming sites. Today, there 
are nearly 2,000. Without Congressional action, nearly $5 
billion will be wagered on Internet gaming sites this year 
alone.''
    The bill builds on the recommendations of the NGISC by 
prohibiting gambling businesses from accepting credit cards or 
other bank instruments in connection with unlawful Internet 
gambling. Internet gambling could not attract customers without 
making use of our payments system. Every Internet gambler must 
use a credit card, fund transfer, or bank instrument to open 
and fund an account from which to gamble on a web site. The 
uncertain legal status of Internet gambling (in terms of 
potential criminal liability and of the collectibility of 
gambling debts incurred over the Interne \4\) has already 
caused some responsible banks and Internet service providers to 
move away from a connection with Internet gambling web 
sites.\5\ But those commendable private efforts do not amount 
to an adequate solution to the problem.\6\
---------------------------------------------------------------------------
    \4\ Most courts that have ruled on the matter have held that the 
operation of offshore Internet gambling sites to which bets and funds 
are posted from the United States is illegal, because the wager is made 
at the gambler's computer, not in the jurisdiction in which the 
wagering instruction is received. At least one successful federal 
prosecution of the operator of an offshore Internet sportsbook (who was 
found in the United States) has occurred. U.S. v. Cohen, 260 F.3d 68 
(2001). However, another federal court of appeals recently limited the 
most directly relevant federal statute, the so-called ``Wire Act,'' 18 
U.S.C. 1084, to sports betting, adopting a Louisiana District Court's 
analysis. In re MasterCard Int'1 Inc., Internet Gambling Litigation, 
313 F. 3d 257, 262-263 (5th Cir. 2002), citing In re MasterCard Int'l 
Inc., Internet Gambling Litigation, 132 F.Supp. 2d 468, 479-81 (E.D. 
La. 2001) (Wire Act could not form basis for civil RICO recovery in 
class action on behalf of gamblers on Internet sites). Several other 
courts have ruled that gambling debts incurred on the Internet are not 
collectible under the law of contracts.
    \5\ GAO reports that the eight largest U.S. credit-card issuing 
banks, accounting for an estimated 80 per cent of U.S. credit card 
volume, have voluntarily sought to block credit card use for Internet 
gambling, because of the Internet gambling industry's unclear legal 
status and doubts about the validity of debts incurred for such 
purposes under state law. (GAO Report, supra, at p. 24). Yahoo and 
several other Internet content providers have stopped carrying 
advertisements for Internet casinos. These restrictions have caused 
industry growth and revenue projections to fall. However, the voluntary 
restrictions are not uniformly effective, do not apply to credit cards 
issued by overseas banks, which can be used for wagering, and can be 
avoided by various payment routing schemes.
    \6\ In July 2003, PayPal, Inc., an online payment network, and 
eBay, Inc., its parent company, entered into a $10 million agreement 
with the United States Attorney for the Eastern District of Missouri to 
settle allegations that PayPal had aided in illegal offshore and on-
line gambling activities between mid-June 2000 and November 2002 
(before eBay's purchase of PayPal). The settlement related to the 
processing of illegal gambling transactions involving both sportsbooks 
and on-line casino gambling. PayPal had ended its gambling payment 
service in November 2002.
---------------------------------------------------------------------------
    The bill makes illegal the receipt of funds from the 
payments system by the operator of an Internet gambling site. 
Because of the anticipated difficulty in enforcing this 
prohibition against persons outside a particular jurisdiction, 
the legislation also authorizes the Attorney General (and 
appropriate State officials) to seek an injunction against any 
person to prevent or restrain a violation of the ban, or to 
prohibit banks and other financial service providers from 
processing any credit card or other financial transaction with 
a specified illegal Internet gambling site. The bill also 
requires the Department of the Treasury, in consultation with 
the Federal Reserve Boardand the Attorney General, to issue 
rules requiring each designated payment system, and all of its 
participants, to identify and prevent transactions barred by the bill--
that is remittances to the operators of Internet gambling sites--
through establishment of policies and procedures reasonably designed to 
allow identification and blocking of such transactions and to prohibit 
the use of payment system services for such transactions.
    The bill thus contemplates, in part, an enforcement 
mechanism whereby banks and other financial service providers 
will be provided, pursuant to an injunctive proceeding, with 
the names of specific Internet gambling operations to which 
payments are to be prohibited. The obligation of financial 
institutions pursuant to such an injunction would be similar, 
in effect, to their obligations under certain other U.S. laws, 
such as those administered by the Office of Foreign Assets 
Control (OFAC) under U.S. economic sanctions programs.

                                Hearings

    The Committee heard testimony on March 18, 2003 regarding 
proposals to regulate illegal Internet gambling. The witnesses 
testifying were Senator John Kyl; Mr. John G. Malcolm, Deputy 
Assistant Attorney General, Criminal Division, United States 
Department of Justice; Mr. Richard Blumenthal, Attorney 
General, State of Connecticut; Mr. L. Richard Fischer, 
Attorney-at-Law, Morrison & Foerster L.L.P; Mr. Frank 
Fahrenkopf, President and CEO, American Gaming Association; Mr. 
William S. Saum, Director of Agent, Gambling, and Amateurism 
Activities, National Collegiate Athletic Association; Mr. 
Stewart Baker, General Counsel, U.S. Internet Service Provider 
Association and Attorney-at-Law, Steptoe and Johnson, L.L.P.; 
and Mr. Frank Catania, President, Catania Consulting.

             Section-by-Section Analysis of the Legislation


Section 1. Short title; table of contents

    Section 1 contains the short title of the bill, ``the 
Internet Gambling Funding Prohibition Act''.

Section 2. Findings and purposes

    Section 2 states the Congressional findings underlying the 
bill. These are that:
          1. Internet gambling is primarily made possible by 
        bettors' use of credit cards, wire transfers, and other 
        payment system instruments to fund gambling accounts;
          2. The 1999 Report of the Congressionally-created 
        National Gambling Impact Study Commission recommended 
        legislative prohibition of wire transfers to Internet 
        gambling sites or their banks;
          3. Internet gambling is a growing cause of debt 
        collection problems for insured depository institutions 
        and the consumer credit industry;
          4. Internet gambling conducted through off-shore 
        jurisdictions has been identified by U.S. law 
        enforcement officials as a significant money laundering 
        vulnerability; and
          5. Gambling through the Internet has grown rapidly in 
        last half-decade and opens up the possibility of 
        immediate, individual, 24-hour access in every home to 
        the full range of wagering opportunities on sporting 
        events or casino-like contests, such as roulette, slot 
        machines, poker, or blackjack.

Section 3. Prohibition on acceptance of any payment system instrument, 
        credit card, or fund transfer for internet gambling

    Section 3 of the bill adds a new Subchapter IV, 
``Prohibition of Funding of Internet Gambling'', to Chapter 53 
of title 31 of the United States Code. The new Subchapter has 
eight sections.
    Section 5361. Definitions.
    Section 5362. Office of Electronic Funding Oversight; 
policies and procedures to identify and prevent restricted 
transactions.
    Section 5363. Prohibition on acceptance of any bank 
instrument for Internet gambling.
    Section 5364. Civil remedies.
    Section 5365. Criminal penalties.
    Section 5366. Circumventions prohibited.
    Section 5367. Rule of construction.
    Section 5368. Authorization of appropriations.
            Section 5361. Definitions
    Section 5361 contains a set of definitions that are used 
throughout the new Subchapter.
    1. A ``bet or wager'' is the staking or risking by any 
person of something of value upon the outcome of a contest of 
others, a sporting event, or a game subject to chance, upon an 
agreement or understanding that that person or another person 
will receive something of value in the event of a certain 
outcome. The term includes the purchase of a chance or 
opportunity to win a lottery or to win another prize (if the 
opportunity to win is predominantly subject to chance); a 
scheme of a type described in 28 U.S.C. 3702 (relating to 
unlawful sports gambling); and any instructions or information 
pertaining to establishment or movement of funds in, to, or 
from an account by a bettor or customer with respect to the 
business of betting or wagering.
    The term ``bet or wager'' does not include, for purposes of 
the bill, any activity governed by the federal securities laws 
for the purchase or sale of securities \7\; a transaction 
conducted on or subject to the rules of a registered entity or 
exempt board of trade pursuant to the Commodity Exchange Act 
\8\; any over-the-counter derivative instrument; any other 
transaction that is excluded or exempt from regulation under 
the Commodity Exchange Act or is exempt from state gambling or 
bucket shop laws under section 12(e) of the Commodity Exchange 
Act or section 28(a) of the Securities Exchange Act of 1934 
\9\; and any contract of indemnity or guarantee, contract for 
insurance, or deposit or other transaction with an ``insured 
institution.'' \10\
---------------------------------------------------------------------------
    \7\ The terms ``securities laws'' and ``securities'' have the terms 
given them in sections 3(a)(47) and 3(a)(10), respectively, of the 
Securities Exchange Act of 1934, 15 U.S.C. 78c(a)(47) and (a)(10)
    \8\ 7 U.S.C. 1, et seq.
    \9\ 7 U.S.C. 16(e); 15 U.S.C. 78bb(a).
    \10\ See section 5361(12)(D), proposed by the bill, for the 
definition of ``insured institution''.
---------------------------------------------------------------------------
    Finally, for purposes of the bill, the term ``bet or 
wager'' does not include participation in a simulation sports 
game, an educational game, or a contest, subject to three 
conditions, all of which must apply for the exclusion to 
obtain. First, the game or contest must not be dependent solely 
on the outcome of a single sporting event or on a singular 
individual performance, by a nonparticipant, in any single 
sporting event. Second, the game or contest must have an 
outcome that reflects the relative knowledge of the 
participants or their skill at physical reaction or physical 
manipulation, rather than chance, and, in addition, in the case 
of a simulation sports game, must have an outcome determined 
predominantly by the accumulated statistical results ofsporting 
events. Finally, the prize or award offered to the participant in the 
game or contest must have been established in advance and not be 
determined by the number of participants in the game or contest or the 
amount of fees they pay to participate.
    2. The term ``business of betting or wagering'' is 
specified not to include, except for purposes of the provisions 
of section 5366, discussed below,\11\ any creditor, credit card 
issuer, insured institution, or other financial institution, 
operator of a terminal at which an electronic fund transfer may 
be initiated, money transmitting business, or international, 
national, regional, or local network utilized to effect a 
credit transaction, electronic fund transfer, stored value 
product transaction, or money transmitting service, or any 
participant in such network, or any interactive computer 
service or telecommunications service.
---------------------------------------------------------------------------
    \11\ Under the latter provision the exclusion does not apply in 
specified circumstances, and one of the specified persons--for example 
a creditor or an international, national, regional, or local network 
utilized to effect a credit transaction, electronic fund transfer, 
stored value product transaction, or money transmitting service, or any 
participant in such a network--can be found to be in the business of 
betting and wagering for purposes of the bill.
---------------------------------------------------------------------------
    3. A ``closed-loop subscriber-based service'' is an 
information service or system that uses one or more devices, 
that are expressly authorized and operated in accordance with 
the laws of a state (the ``authorizing state''), exclusively 
for placing, receiving, or otherwise making a bet or wager that 
is described in section 5363(b) or (c),\12\ so long as three 
conditions are met. First, the service or system must require 
persons in any state to register with the provider of the 
wagering service by giving the provider their names, addresses, 
and appropriate billing information, before being authorized to 
use the system to place, receive or otherwise make a bet or 
wager; and must allow those persons to wager using the system 
only when they are present within that state. Second, the 
closed-loop service must include an effective customer 
verification and age verification system, expressly authorized 
and operated in accordance with the laws of the authorizing 
state, as well as a system reasonably designed to verify the 
location at which a bet or wager is made, to ensure that all 
applicable federal and state legal and regulatory requirements 
for lawful gambling are met. Finally, the subscriber-based 
service must include appropriate data security standards to 
prevent unauthorized access by any person who has not 
subscribed or who is a minor.
---------------------------------------------------------------------------
    \12\ Sections 5363(b) and (c) exempt betting on certain live horse 
and dog racing events and on certain games authorized under the Indian 
Gaming Regulatory Act from the operation of the bill.
---------------------------------------------------------------------------
    4. A ``designated payment system'' is any system used by 
any creditor, credit card issuer, financial institution, 
operator of a terminal at which an electronic fund transfer may 
be initiated, money transmitting business, or international, 
national, regional, or local network utilized to effect a 
credit transaction, electronic fund transfer, stored value 
product transaction, or money transmitting service, or any 
participant in such network, that the Secretary, in 
consultation with the Board of Governors of the Federal Reserve 
System and the Attorney General, determines, by regulation or 
order, could be utilized in connection with, or to facilitate, 
any transaction--called a ``restricted transaction''--barred by 
section 5363. It is expected that the Secretary will designate 
at least the major national and international funds transfer 
systems as well as, for example, credit and debit card systems, 
closed loop and other systems used by money transmitters and 
Internet-based payment systems.
    5. The ``Internet'' is the international computer network 
of interoperable packet switched data networks.
    6. ``Interactive computer service'' has the same meaning as 
in section 230(f) of the Communications Act of 1934. The latter 
section defines an ``interactive computer service'' as any 
information service, system, or access software provider that 
provides or enables computer access by multiple users to a 
computer server including specifically a service or system that 
provides access to the Internet and such systems operated or 
services offered by libraries or educational institutions.\13\
---------------------------------------------------------------------------
    \13\ 47 U.S.C. 203(f)(2).
---------------------------------------------------------------------------
    7. ``Internet gambling'' is the placing, receipt, or other 
transmission of a bet or wager by any means which involves the 
use, at least in part, of the Internet.
    8. The ``Office'' is the Office of Electronic Funding 
Oversight established at the Department of Treasury by section 
5362(a).
    9. A ``private network'' is a communications channel or 
channels, including voice or computer data transmission 
facilities, that use either private dedicated lines or the 
public communications infrastructure that is secured, by means 
of the appropriate private communications technology, to 
prevent unauthorized access.
    10. A ``restricted transaction'' is any transaction or 
transmittal involving any credit, funds, instrument, or 
proceeds described in any paragraph of section 5363(a) which a 
person engaged in the business of betting or wagering is 
prohibited from accepting under the bill.
    11. ``Secretary'' means the ``Secretary of the Treasury.''
    12. ``Credit,'' ``creditor,'' ``credit card,'' and ``card 
issuer'' have the same meanings as in section 103 of the Truth 
in Lending Act.\14\
---------------------------------------------------------------------------
    \14\ 15 U.S.C. 1601 et seq.
---------------------------------------------------------------------------
    13. ``Electronic fund transfer'' generally has the meaning 
given that term in section 903 of the Electronic Fund Transfer 
Act (EFTA).\15\ However, the exclusion from the EFTA definition 
of certain transfers of funds initiated by telephone 
conversations is not recognized for purposes of the bill.\16\
---------------------------------------------------------------------------
    \15\ U.S.C. 1693a et. seq. (EFTA).
    \16\ Thus, a ``transfer of funds which is initiated by a telephone 
conversation between a consumer and an officer or employee of a 
financial institution which is not pursuant to a prearranged plan and 
under which periodic or recurring transfers are not contemplated,'' is 
an electronic fund transfer subject to the restrictions of the bill, 
although such a transfer is excluded from the definition of electronic 
fund transfer for purposes of the general provisions of the EFTA.
---------------------------------------------------------------------------
    14. ``Financial institution'' also generally has the 
meaning given that term in section 903 of the EFTA. However, 
for purposes of the bill, the term does not include a casino, 
sports book, or other business at or through which bets or 
wagers may be placed or received, regardless of whether such an 
entity would be treated as a financial institution under the 
EFTA.
    15. An ``insured institution'' is an insured depository 
institution, as defined in section 3 of the Federal Deposit 
Insurance Act or an insured credit union, as defined in section 
101 of the Federal Credit Union Act.\17\
---------------------------------------------------------------------------
    \17\ 12 U.S.C. 1751.
---------------------------------------------------------------------------
    16. The terms ``money transmitting business'' and ``money 
transmitting service'' have the same meanings as in 31 U.S.C. 
5330. However, that meaning is to be determined without regard 
to any regulations issued by the Secretary to narrow the 
definition of those terms for purposes of the implementation of 
section 5330.
            Section 5362. Office of Electronic Funding Oversight; 
                    policies and procedures to identify and prevent 
                    restricted transactions
    Section 5362(a) creates within the Department of the 
Treasury an Office of Electronic Funding Oversight. The 
Director of the Office, who is to be appointed by the Secretary 
of the Treasury, is given specific responsibilities in the 
bill. The Director is also given the more general 
responsibility for coordinating federal efforts to prevent 
transactions or transmittals involving credit, funds, 
instruments, or proceeds, from individuals in the United States 
to persons engaged in the business of betting or wagering and 
involving Internet gambling.
    Restricted Transaction Regulations. Section 5362(b) 
requires the Secretary of the Treasury to prescribe regulations 
(the ``restricted transaction regulations''), in consultation 
with the Board of Governors of the Federal Reserve System and 
the Attorney General of the United States, within 270 days of 
the bill's enactment. The restricted transaction regulations 
must require each designated payment system, and all of its 
participants, to identify and prevent restricted transactions 
through establishment of policies and procedures reasonably 
designed to
          (1) Allow the payment system and any person involved 
        in the payment system to identify restricted 
        transactions by means of codes in authorization 
        messages or by other means;
          (2) Block restricted transactions identified as a 
        result of thereof; and
          (3) Prevent the acceptance of the products or 
        services of the payment system in connection with a 
        restricted transaction.
Section 5362(c) describes specific subjects with which the 
restricted transaction regulations must deal. First, those 
regulations must identify types of policies and procedures 
which would be deemed, as applicable, to be ``reasonably 
designed to identify'', ``reasonably designed to block,'' or 
``reasonably designed to prevent the acceptance of [designated 
payment system] products or services'' with respect to each 
type of restricted transaction. The necessary policies and 
procedures are to be illustrated by ``non-exclusive examples'' 
that financial institutions can use as guidance to adjust the 
application of the policies and procedures to their own 
situations.
    Second, to the extent practical, the regulations are to 
permit any payment system participant a choice among 
alternative means of identifying and blocking, or otherwise 
preventing, the acceptance of the products or services of the 
payment system or payment system participant in connection with 
restricted transactions.
    Finally, the Secretary is given the authority to exempt a 
transaction from any requirement imposed under the restricted 
transaction regulations, if a finding is made that it is not 
reasonably practical to identify and block, or otherwise 
prevent, the transaction. It is anticipated that this authority 
is to be used sparingly and to be focused on specific types of 
transactions rather than broad classes either of payment 
systems, gambling businesses, or types of transactions. (The 
designation and exemption provisions, in any event, apply only 
to the regulatory authority created by section 5362, not to the 
general operation of sections 5363-5368.)
            Compliance with and enforcement of restricted transaction 
                    regulations
    Effect of Compliance. Under section 5362(c), a person will 
be considered to be in compliance with the restricted 
transaction regulations if the policies and procedures of the 
payment system of which the person is a member or in which it 
participates comply with those regulations, and the person 
relies on and complies with those policies and procedures to 
identify and block restricted transactions and to prevent 
acceptance of its own products or services, and those of the 
payment system, in connection with restricted transactions.
    Protection from Liability to Private Third Parties. Under 
section 5362(e), a person subject to the restricted transaction 
regulations who blocks, or otherwise refuses to honor, a 
restricted transaction (or a transaction that such person 
reasonably believes to be a restricted transaction), or who, as 
a member of a designated payment system, relies on the policies 
and procedures of the payment system, in an effort to comply 
with the restricted transaction regulations, shall not be 
liable to any private third party for such action.
    Enforcement Jurisdiction. Section 5362(f) provides that the 
restricted transaction regulations are to be enforced by the 
Federal functional regulators and the Federal Trade Commission, 
in the manner provided in section 505(a) of the Gramm-Leach-
Bliley Act, 15 U.S.C. 6805(a).
            Section 5363. Prohibition on acceptance of any bank 
                    instrument for Internet gambling
    Section 5363(a) provides that no person engaged in the 
business of betting or wagering may knowingly accept, in 
connection with the participation of another person in Internet 
gambling, any of the following:
          1. Credit, or the proceeds of credit, extended, 
        through a credit card or other means, to or on behalf 
        of such other person;
          2. An electronic fund transfer, or funds transmitted 
        by or through a money transmitting business, or the 
        proceeds of an electronic fund transfer or money 
        transmitting service, from or on behalf of such other 
        person;
          3. Any check, draft, or similar instrument which is 
        drawn by or on behalf of such other person and is drawn 
        on or payable at or through any financial institution; 
        or
          4. The proceeds of any other form of financial 
        transaction, as the Secretary may prescribe by 
        regulation, which involves a financial institution as a 
        payor or financial intermediary on behalf of or for the 
        benefit of such other person.
This is the basic prohibition of the statute. The language 
makes illegal the knowing acceptance of funds through any of 
these means by a person engaged in the business of betting or 
wagering, in connection with another's participation in 
Internet gambling. Making knowing acceptance of such funds by 
operators of Internet gambling websites and similar businesses 
a violation of federal law does not lessen or alter, and is not 
intended to supersede or affect, the application to an Internet 
gambling business of other relevant provisions of federal or 
state law under which operation of such businesses may be 
illegal, or to affect operation of contract law rules that, 
e.g., make collection of gambling debts illegal, when such a 
law or rule would otherwise apply.\18\
---------------------------------------------------------------------------
    \18\ Similarly, the fact that certain limited types of gaming are 
not covered by section 5363(a) does not imply any view of the 
application of other federal or state laws to those types of gaming. 
See section 5367, below. See also, e.g., Internet Gambling, An Overview 
of the Issues, General Accounting Office (GAO-03-89) (December 2002), 
Appendix II: Interstate Horseracing Act (possible conflict between the 
Wire Act, 18 U.S.C. 1084, and the Interstate Horseracing Act).
---------------------------------------------------------------------------
    Rules of application. Sections 5363(b) and (c) exclude 
certain types of gaming arrangements that make use of 
electronic transmissions from the scope of the general 
prohibition of section 5363(a).
    Live horse and dog racing. The prohibition does not apply, 
under section 5363(b), to any otherwise lawful bet or wager on 
a closed-loop subscriber-based service (whether on an 
interstate or intra-state basis) on a live horse or live dog 
race, or to the sending or receiving, or inviting of, 
information assisting in the placing of such a bet or wager, so 
long as several conditions are met. First, as noted, the bet or 
wager must be placed, received, or otherwise made on a closed-
loop subscriber service that satisfies the terms set out in 
section 5361(3). Second, the bet or wager must be expressly 
authorized, and licensed or regulated, by the state in which 
the bet or wager is received, under both applicable Federal law 
and the laws of the state. Third, the bet or wager must be 
initiated from and received in states in which betting or 
wagering on that same type of live horse or live dog racing is 
lawful. Fourth, any bets or wagers placed in this manner must 
be subject to the regulatory oversight of the state in which 
the bet or wager is received, and be subject to minimum control 
standards for the accounting, regulatory inspection, and 
auditing by such state of all such bets or wagers transmitted 
from one state to another. Fifth, any such bets or wagers must, 
in the case of live horse racing, be made in accordance with 
the Interstate Horse Racing Act of 1978.\19\ Finally, the 
exception does not apply to any bet or wager placed, received, 
or otherwise made by the use of an agent or proxy using the 
Internet or an interactive computer service.\20\
---------------------------------------------------------------------------
    \19\ 15 U.S.C. 3001 et seq. In the case of live dog racing any such 
bets must be subject to consent agreements comparable to those required 
by the Interstate Horse Racing Act, approved by the appropriate state 
regulatory agencies, in the state receiving the signal, and in the 
state in which the bet or wager originates. Again, however, Section 
5363(b) is not intended to imply any view as to the application of 
other federal or state laws to gaming described in that section, see fn 
19, supra.
    \20\ The owner-operator of a parimutuel wagering facility that is 
licensed by a state may employ an agent in the operation of the account 
wagering system owned or operated by the parimutuel facility. However, 
that agent must be an agent of the owner-operator, and may not accept 
bets from or on behalf of third parties who could not place bets 
directly under the terms of the exception.
---------------------------------------------------------------------------
    Certain electronic links between tribal gaming sites. Under 
section 5363(c), the general prohibition does not apply to any 
otherwise lawful bet or wager on a closed-loop subscriber-based 
service or private network on any game that constitutes class 
II gaming or class III gaming under the Indian Gaming 
Regulatory Act (the ``IGRA''),\21\ or to the sending, 
receiving, or inviting of information assisting in the placing 
of any such bet or wager, as applicable, so long, again, as 
several conditions are met.
---------------------------------------------------------------------------
    \21\ 25 U.S.C. 2701 et seq.
---------------------------------------------------------------------------
    First, the game must be permitted under and conducted in 
accordance with the IGRA so that all provisions of the IGRA are 
satisfied in connection with the offering and operation of the 
game. Second, the game must be conducted on a closed-loop 
subscriber-based service, or on a private network, that 
satisfies the terms set out in section 5361(3) or 5361(9) of 
the bill respectively. Third, each person placing, receiving, 
or otherwise making such bet or wager, or transmitting such 
information, must be physically located on Indian lands (as 
that term is defined in section 4 of the IGRA \22\), when such 
person places, receives, or otherwise makes the bet or wager, 
or transmits such information. Fourth, any game that 
constitutes class III gaming must be authorized under, and 
conducted in accordance with, the respective tribal-state 
compacts, entered into and approved pursuant to \23\ the IGRA, 
in each respective state in which each person is physically 
located when he or she places, receives, or otherwise makes the 
bet or wager, or transmits such information. Finally, each such 
compact must expressly provide that the Class III game may be 
conducted using the Internet or other interactive computer 
service only on a closed-loop subscriber-based system or a 
private network. (Section 5363(d)(2) contains a transitional 
rule easing the latter requirement for gaming that was being 
conducted on Indian lands on July 31, 2003, using the Internet 
or other interactive computer service, with the approval of the 
state gaming commission or like regulatory authority of the 
state in which the Indian lands are located.)
---------------------------------------------------------------------------
    \22\ 25 U.S.C. 2703. Section 5363(c)(2)(B) contains a special 
definition of Indian lands for purposes of a transitional rule for 
gaming under certain tribal-state compacts.
    \23\ See section 1(d) of the IGRA, 25 U.S.C. 2710(d).
---------------------------------------------------------------------------
            Section 5364. Civil remedies
    The district courts of the United States will have original 
and exclusive jurisdiction to prevent and restrain violations 
of the bill or of the rules or regulations issued under the 
bill by issuing appropriate orders in accordance with the 
provisions of section 5364. Such orders, if otherwise 
justified, may be issued whether or not a prosecution has been 
initiated under section 5365 for criminal violations of the 
bill.
    Standing. Civil enforcement of the bill may be sought by 
the United States, acting through the Attorney General or, if 
the proceedings involve the restricted transaction regulations, 
by an agency authorized to enforce those regulations under 
section 5363(f) of the bill. In addition, the attorney general 
(or other appropriate state official) of a state in which a 
violation of the bill allegedly has occurred or will occur may 
institute proceedings to prevent or restrain the violation or 
threatened violation.
    If a violation of the bill or the relevant rules or 
regulations is alleged to have occurred, or may occur, on 
Indian lands, \24\ the Attorney General (or the relevant 
functional regulator) is to have general enforcement authority, 
but the enforcement authorities specified in any applicable 
tribal-state compact shall also apply in accordance with the 
terms of that compact.
---------------------------------------------------------------------------
    \24\ Again, the relevant definition of ``Indian lands'' is that 
contained in section 4 of the IGRA.
---------------------------------------------------------------------------
     Relief. Upon application of the United States (whether by 
the Attorney General or a federal functional regulator) or of 
the attorney general (or other appropriate state official) of 
an affected state, the district court may enter a preliminary 
injunction or a permanent injunction (or both) against any 
person to prevent or restrain a violation or threatened 
violation of the bill. In exigent circumstances, the court may 
enter a temporary restraining order against a person alleged to 
be in violation of the bill or the rules or regulations issued 
under the bill, either upon application of the United States or 
an appropriate official of an affected state.
    Section 5364(f) contains a special procedural rule designed 
to coordinate regulatory and injunctive enforcement of the bill 
and allow a reasonable period for financial institutions and 
system operators to reprogram computerized processing systems. 
Under that rule, before seeking a preliminary injunction \25\ 
against, among others, any creditor, credit card issuer, 
financial institution, money transmitting business, or 
international, national, regional, or local network utilized to 
effect various kinds of fund transfers, or any participant in 
such a network, (i) the relevant government official must 
notify that person, and the appropriate federal functional 
regulator, of the violation or potential violation and the 
remedy to be sought; and (ii) the person must be given not 
longer than 60 days for implementation of a remedy (in 
conjunction with such action as the appropriate regulator may 
take), so long as the person takes reasonable steps within that 
60-day period to prevent the occurrence of the violation or 
potential violation pending implementation of the more complete 
long-term remedy.
---------------------------------------------------------------------------
    \25\ The same notice and ``period to cure'' requirements apply 
before an official may seek expedited relief that involves an insured 
institution or a broker or dealer or investment company registered with 
the Securities and Exchange Commission.
---------------------------------------------------------------------------
    Section 5363(e) lists factors the district courts are to 
consider in granting injunctive relief against a payment system 
or payment system participant. Those factors include:
          (1) The extent to which the person extending credit 
        or transmitting funds knew or should have known that 
        the transaction was in connection with Internet 
        gambling;
          (2) The history of such person in extending credit or 
        transmitting funds when such person knew or should have 
        known that the transaction is in connection with 
        Internet gambling;
          (3) The extent to which such person has established 
        and is maintaining policies and procedures in 
        compliance with rules and regulations issued under the 
        bill;
          (4) The extent to which it is feasible for any 
        specific remedy prescribed as part of such relief to be 
        implemented by such person without substantial 
        deviation from normal business practice; and
          (5) The costs and burdens that the specific remedy 
        will have on such person.
    Interactive Computer Services. Section 5364(d) limits the 
grant of civil relief under the bill against an interactive 
computer service. That relief is limited to removal of, or 
disabling of access to, an online site violating the bill or a 
hypertext link to such an online site that resides on a 
computer server that such service controls or operates. \26\ In 
addition any such relief (i) is available, in the case of an 
interactive computer service, only after notice to the computer 
service and an opportunity for the service to appear are 
provided, (ii) may not impose any obligation on the interactive 
computer service to monitor its service or to affirmatively 
seek facts indicating activity violating the bill's terms, 
(iii) must specify the interactive computer service to which it 
applies; and (iv) must specifically identify the location of 
the online site or hypertext link to be removed or access to 
which is to be disabled.
---------------------------------------------------------------------------
    \26\ The limitation does not apply--and broader relief is 
potentially available--against interactive services arrangements that 
are found to violate the anti-circumvention rules in section 5366.
---------------------------------------------------------------------------
    An interactive computer service that does not violate the 
bill will not be liable under 18 U.S.C. 1084 for conduct within 
the scope of the bill, so long as the computer service does not 
have actual knowledge and control of bets and wagers; does not 
itself operate, manage, supervise, or direct an Internet 
website at which bets or wagers may be placed, received, or 
otherwise made or at which bets or wagers are offered to be 
placed, received, or otherwise made; and does not own or 
control, and is not owned or controlled by, any person who 
operates, manages, supervises, or directs an Internet website 
at which bets or wagers may be placed, received, or otherwise 
made, or at which bets or wagers are offered to be placed, 
received, or otherwise made. However, the absence of liability 
under section 1084 does not affect any potential liability of 
an interactive computer service or other person under any other 
provision of Title 18 of the United States Code.
            Section 5365. Criminal penalties
    Section 5365 concerns criminal enforcement of the bill. 
Under that section, a person who violates any provision of the 
bill or the restricted transaction regulations shall be subject 
to fine, imprisonment for not more than five years, or both. 
Upon conviction, the court may enter a permanent injunction 
enjoining such person from placing, receiving, or otherwise 
making bets or wagers or sending, receiving, or inviting 
information assisting in the placing of bets or wagers.
            Section 5366. Circumventions prohibited
    Section 5361(2) generally excludes financial institutions, 
creditors, payment system operators or participants, 
interactive computer services, or telecommunications services 
from the definition of ``business of betting and wagering.'' 
Under the anti-circumvention provision of section 5366, 
however, any financial institution or other person listed in 
section 5361(2) may be treated as engaged in the business of 
betting and wagering (and be directly subject to the 
prohibitions of the statute) if such person (i) operates, 
manages, supervises, or directs an Internet website at which 
bets or wagers may be placed, received, or otherwise made, or 
at which bets or wagers are offered to be placed, received, or 
otherwise made; or (ii) owns or controls, or is owned or 
controlled by, any person who operates, manages, supervises, or 
directs an Internet website at which bets or wagers may be 
placed, received, or otherwise made, or at which bets or wagers 
are offered to be placed, received, or otherwise made.
            Section 5367. Rule of construction
    As noted above, no provision of the bill shall be construed 
as altering, superseding, or otherwise affecting the 
application of the IGRA.
            Section 5368. Authorization of appropriations
    Section 5368 simply authorizes the appropriation to the 
Secretary of such sums as may be necessary to carry out the new 
provisions added to Title 31 by section 3 of the bill.

Section 4. Internet gambling in or through foreign jurisdictions

    Section 4 provides that, in deliberations between the U.S. 
Government and any other country on money laundering, 
corruption, and crime issues, the U.S. Government shall: 
encourage cooperation by foreign governments in identifying 
whether Internet gambling operations are being used for money 
laundering, corruption, or other crimes; advance policies that 
promote the cooperation by foreign governments in the 
enforcement of the bill; and encourage the Financial Action 
Task Force on Money Laundering to study the extent to which 
Internet gambling operations are being used for money 
laundering. Section 4 also requires the Secretary of the 
Treasury to submit an annual report to Congress on the 
deliberations between the United States and other countries on 
issues relating to Internet gambling.

Section 5. Amendments to criminal gambling provisions

    Section 5 amends the Wire Act definitions under section 
1081 of Title 18 and increases the penalty for unlawful wire 
transfers of wagering information to five years imprisonment 
from two years imprisonment under present law.

                        Changes in Existing Law

    On June 18, 2003, the Committee unanimously approved a 
motion by Senator Shelby to waive the Cordon rule. Thus, in the 
opinion of the Committee, it is necessary to dispense with the 
requirement of section 12 of Rule XXVI of the Standing Rules of 
the Senate in order to expedite the business of the Senate.

                      Regulatory Impact Statement

    In accordance with paragraph 11(b), rule XXVI, of the 
Standing Rules of the Senate, the Committee makes the following 
statement concerning the regulatory impact of the bill. The 
Committee, after due consideration, concludes that the bill 
will not have significant regulatory impact.
    The bill would prohibit gambling businesses from accepting 
credit cards, checks, or other bank instruments from gamblers 
who bet over the Internet. To accomplish this purpose, the bill 
would require designated payment systems to establish policies 
and procedures designed to identify and prevent transactions in 
connection with Internet gambling. Most financial institutions 
have some capacity to identify and block restricted 
transactions for the purposes of compliance with other laws, 
such as those relating to U.S. economic sanctions programs and 
money laundering prevention. Some participants in these payment 
networks have already voluntarily established policies to 
prohibit these types of transactions. Thus, it is anticipated 
that the costs of compliance imposed by this bill would be 
small. In addition, to the extent that individual gamblers will 
be precluded from using bank instruments, financial entities 
may experience some cost savings as they will be less likely to 
have gamblers defaulting on debts incurred.

                          Cost of Legislation

    Section 11(b) of rule XXVI of the Standing Rules of the 
Senate, and Section 403 of the Congressional Budget Impoundment 
and Control Act, require that each committee report on a bill 
contain a statement estimating the cost of the proposed 
legislation. The Congressional Budget Office has provided the 
following cost estimate and estimate of costs of private-sector 
mandates.

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, September 8, 2003.
Hon. Richard C. Shelby,
Chairman, Committee on Banking, Housing, and Urban Affairs,
U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 627, the Internet 
Gambling Funding Prohibition Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contacts are Kathleen 
Gramp (for federal costs), Sarah Puro (for the impact on state 
and local governments), and Cecil McPherson (for the impact on 
the private sector).
            Sincerely,
                                       Douglas Holtz-Eakin,
                                                          Director.
    Enclosure.

S. 627--Internet Gambling Funding Prohibition Act

    Summary: S. 627 would prohibit gambling businesses from 
accepting credit cards, checks, or other bank instruments from 
gamblers who illegally bet over the Internet. The bill also 
would require financial institutions to take steps to identify 
and block gambling-related transactions that are transmitted 
through their payment systems. The Office of the Comptroller of 
the Currency (OCC), the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation 
(FDIC), the Office of Thrift Supervision (OTS), and the 
National Credit Union Administration (NCUA) would enforce the 
provisions of S. 627 as they apply to financial institutions. 
The Federal Trade Commission and the Department of Justice 
would be responsible for other enforcement actions. Finally, S. 
627 would establish an Office of Electronic Funding Oversight 
in the Department of Treasury to issue regulations, coordinate 
federal programs, and implement certain initiatives.
    Assuming appropriation of the necessary amounts, CBO 
estimates that implementing this legislation would cost about 
$1 million in 2004 and a total of $9 million over the 2004-2008 
period. The bill could affect direct spending and revenues, but 
CBO estimates that any impact on direct spending and revenues 
would not be significant.
    S. 627 contains an intergovernmental mandate as defined in 
the Unfunded Mandates Reform Act (UMRA), but any costs incurred 
by state, local, and tribal governments would not be 
significant and would not exceed the threshold established in 
that act ($59 million in 2003, adjusted annually for 
inflation).
    The bill would impose new private-sector mandates, but CBO 
estimates that the direct costs of the mandates would fall 
below the annual threshold established in UMRA ($117 million in 
2003, adjusted annually for inflation) in any of the next five 
years.
    Estimated Cost to the Federal Government: The estimated 
budgetary impact of S. 627 is shown in the following table. The 
costs of this legislation fall within budget function 370 
(commerce and housing credit).

----------------------------------------------------------------------------------------------------------------
                                                                       By fiscal year, in millions of dollars--
                                                                    --------------------------------------------
                                                                       2004     2005     2006     2007     2008
----------------------------------------------------------------------------------------------------------------
                                CHANGES IN SPENDING SUBJECT TO APPROPRIATION \1\

Estimated Authorization Level......................................        2        2        2        2        2
Estimated Outlays..................................................        1        2        2        2       2
----------------------------------------------------------------------------------------------------------------
\1\ Enacting S. 627 also could affect direct spending and revenues by less than $500,000 a year.

    Basis of Estimate: For this estimate, CBO assumes that S. 
627 will be enacted in the fall of 2003 and that the funds 
authorized will be appropriated each year. The estimate of 
outlays is based on spending patterns for similar activities.

Spending subject to appropriation

    Based on information from the Department of Treasury and 
other affected agencies, CBO estimates that implementing this 
bill would cost about $2 million a year, assuming appropriation 
of the necessary amounts. Most of this spending would be for 
the new Office of Electronic Funding Oversight; we expect that 
any additional spending by the Department of Justice and the 
Federal Trade Commission would be negligible. Because S. 627 
would establish new federal crimes relating to Internet 
gambling, the federal government would be able to pursue cases 
that it otherwise would not be able to prosecute. CBO expects, 
however, that most cases would be pursued under existing state 
laws. Therefore, we estimate that any increase in federal costs 
for law enforcement, court proceedings, or prison operations 
would not be significant. Any such additional costs would be 
subject to the availability of appropriated funds.

Direct spending and revenues

    The NCUA, the OTS, and the OCC charge fees to cover all 
their administrative costs; therefore, any additional spending 
by those agencies to implement the bill would have no net 
budgetary effect. That is not the case with the FDIC, however, 
which uses deposit insurance premiums paid by banks to cover 
the expenses it incurs to supervise state-chartered 
institutions. (Under current law, CBO estimates that the vast 
majority of thrift institutions insured by the FDIC would not 
pay any premiums for most of the 2004-2013 period.)
    The bill would cause a small increase in FDIC spending but 
would not affect its premium income. In total, CBO estimates 
that S. 627 would increase direct spending and offsetting 
receipts of the NCUA, OTS, OCC, and FDIC by less than $500,000 
a year over the 2004-2013 period.
    Budgetary effects on the Federal Reserve are recorded as 
changes in revenues (governmental receipts). Based on 
information from the Federal Reserve, CBO estimates that 
enacting S. 627 would reduce such revenues by less than 
$500,000 a year.
    Because those prosecuted and convicted under the bill could 
be subject to criminal fines, the federal government might 
collect additional fines if the bill is enacted. Collections of 
such fines are recorded in the budget as governmental receipts 
(i.e., revenues), which are deposited in the Crime Victims Fund 
and spent in subsequent years. Any additional collections are 
likely to be negligible because of the small number of cases 
involved. Because any increase in direct spending would equal 
the amount of fines collected (with a lag of one year or more), 
the additional direct spending also would be negligible.
    Estimated impact on state, local, and tribal governments: 
S. 627 contains an intergovernmental mandate as defined in UMRA 
because it would preempt state laws and prohibit states from 
fully regulating gambling within their borders. Under the bill, 
any gambling done using the Internet would be regulated by the 
federal government, no longer allowing states to sanction and 
regulate Internet gambling within their own borders. Further, 
all Internet gambling, with the exception of horse and dog 
racing but including state-run lotteries, would be illegal. 
Since no state or tribal government currently sells lottery 
tickets over the Internet, CBO estimates that, over the next 
five years, the costs to state, local, and tribal governments 
resulting from the prohibition would not be significant; 
therefore, the mandate costs would not exceed the threshold 
established in UMRA ($59 million in 2003, adjusted annually for 
inflation).
    Estimated impact on the private sector: S. 627 would impose 
two federal mandates on the private sector. First, the bill 
would require designated payment systems to establish policies 
and procedures designed to identify and prevent transactions in 
connection with Internet gambling. Designated payment systems 
are defined in the bill to include any system utilized by 
businesses such as creditors, credit card issuers, or financial 
institutions to effect a credit transaction, an electronic fund 
transfer, or other transfer of funds. Information provided by 
representatives of the financial services industry indicates 
that such transactions can currently be identified through the 
use of codes. Most financial institutions are currently able to 
identify and block restricted transactions by using the coding 
system. Thus, CBO estimates that the private sector's cost to 
comply with the mandate would be small. There also could be 
direct savings to those entities subject to the mandate as the 
bill limits their liability arising from their compliance with 
the requirement.
    Second, the bill would prohibit gambling businesses, with 
some exceptions, from accepting credit card payments or other 
bank instruments of payment from person who bet or wager over 
the Internet. At the same time, S. 627, would exempt such 
transactions, under certain conditions, involving bets or 
wagers placed, received, or otherwise made on an interstate or 
intrastate basis on a live horse or a live dog race; and class 
II gaming (bingo, etc.) or class III gaming (casino games) on 
Indian reservations. Such a prohibition would have only a 
limited effect because, under current federal and state law, 
most gambling businesses are generally prohibited from 
accepting bets or wagers over the Internet. Further, CBO 
expects that the incremental costs to the entities that would 
have to comply with the requirements of the bill to participate 
in the gaming would not be substantial. CBO estimates that the 
total direct costs for private-sector mandates in this bill 
would fall below the annual threshold established in UMRA ($117 
million in 2003, adjusted annually for inflation).
    Previous estimate: CBO has transmitted three cost estimates 
for legislation related to internet gambling. On April 1, 2003, 
CBO transmitted a cost estimate for H.R. 21, as reported by the 
House Committee on Financial Services on March 27, 2003; on May 
16, CBO transmitted a cost estimate for H.R. 21 as ordered 
reported by the House Committee on the Judiciary on May 14, 
2003; and on May 22, CBO transmitted a cost estimate for H.R. 
2143, the Unlawful Internet Gambling Funding Prohibition Act, 
as ordered reported by the House Committee on Financial 
Services on May 20, 2003. The estimated cost of S. 627 is 
higher than those bills because of the costs associated with 
the activities of the proposed Office of Electronic Funding 
Oversight. CBO estimated no significant federal costs for the 
House bills.
    Unlike H.R. 21 as ordered reported by the House Committee 
on the Judiciary and H.R. 2143 as ordered reported by the House 
Committee on Financial Services, S. 627 would not permit states 
to sanction and regulate Internet gambling within their own 
borders. Therefore, S. 627 contains a mandate in the form of a 
preemption that the other versions of the legislation did not. 
The different cost estimates reflect those differences.
    The private-sector mandate in S. 627 on designated payment 
systems is similar to the mandate identified in the previous 
three estimates. CBO estimated that the total direct costs of 
mandates contained in the bills would fall below the annual 
threshold for private-sector mandates established in UMRA.
    Estimate prepared by: Federal Spending: Lanette J. Walker 
and Kathleen Gramp; Federal Revenues: Mark Booth; Impact on 
State, Local, and Tribal Governments: Sarah Puro; Impact on the 
Private Sector: Cecil McPherson.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis.

                                
