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TUESDAY, JUNE 20, 2000
U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.

    The committee met, pursuant to call, at 10:00 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.

    Present: Chairman Leach; Representatives Roukema, Lucas, Ryun, Riley, Ose, Biggert, Terry, Green, LaFalce, Waters, C. Maloney of New York, Watt, J. Maloney of Connecticut, Meeks, Inslee, Moore and Jones.

    Chairman LEACH. The hearing will come to order. The committee convenes today to hear testimony regarding H.R. 4419, the Internet Gambling Funding Prohibition Act, which would address issues surrounding gambling over the internet. Hundreds of internet gambling sites, most of them based outside of the United States, have been established in recent years providing an easy avenue for vulnerable individuals, such as young people and pathological gamblers, to place bets without leaving home.

    A recent article in Smart Money Magazine, for example, reported that online gambling has become part of campus life in many colleges across the country. The risk is the allure. One student says ''The risk is what is exciting, taking these risks is part of our nature.'' Another student maxed out his own credit cards gambling online and then used his mother's card number in an attempt to win back his losses. The next month, the mother opened her bill to find $100,000 in charges from betting sites.
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    The dual protection of anonymity and encryption raises a host of issues regarding criminal activities. The National Gambling Impact Study Commission report released in June 1999 states that the problems associated with internet gambling include, one, the potential for abuse by gambling operators who can alter, move or entirely remove sites within minutes; two, the ability of computer hackers or gambling operators to tamper with gambling software to manipulate games to their benefit; and, three, the provision of an additional means for individuals to launder money.

    State law has largely shaped legalized gambling in this country; however, the internet manifests new challenges to designing balanced public policy. In this regard the National Gambling Impact Study Commission's report recommended that States are best equipped to regulate gambling within their borders with two exceptions: tribal and internet gambling, where the Federal Government should have the predominant role. The Commission stated that because internet gambling crosses State lines, it is difficult for States to adequately monitor and regulate such gambling. Thus the Commission recommended that the Federal Government prohibit, without new or expanded exemptions, internet gambling and develop appropriate gambling enforcement strategies.

    In this regard the legislation before the committee would complement H.R. 3125, which has been reported out of the Judiciary Committee. This proposal sponsored by our colleague Mr. Goodlatte would extend the current Federal ban on gambling over the telephone to cover the internet. The Commission also recommended that the wire transfers to internet gambling sites and their banks be outlawed and that the Federal Government take diplomatic steps to encourage comparable actions abroad.
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    To address such concerns, H.R. 4419 makes it unlawful for an internet gambling business to accept a bank instrument in connection with the placement of bets or wagers over the internet.

    Before turning to the witnesses from the Department of the Treasury, Justice, and representatives of the States Attorneys General, a distinguished member of the national commission, as well as other private parties and a Member of Congress, let me ask Mr. LaFalce if he would like to make an opening statement.

    Mr. LAFALCE. Very much so, Mr. Chairman.

    I am pleased we are having a hearing on H.R. 4419, that I was honored to cosponsor with you in order that we might better understand the issues that it addresses and the concerns that some may have with specific provisions.

    I understand that both the Justice and the Treasury Departments have identified technical problems, but I hope they can be addressed within the context of this legislation.

    I also had hoped, however, that our hearing today could focus more broadly on all the recommendations of the National Gambling Impact Study Commission that fall within our committee's jurisdiction—not those that fall outside of our committee's jurisdiction, but on all of those that fall within our committee's jurisdiction, not just those involving internet gambling—for the Commission recommended not only that Congress act to prohibit wire transfers and other payments to known internet gambling sites, it also recommended that we prohibit the placing of credit and debit card machines and other electronic payment devices in the immediate vicinity of gambling activities.
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    I introduced legislation last year, H.R. 2811, to implement this other extremely important recommendation of the Commission, and I believe it should also be considered by our committee. After all, it is within our committee's jurisdiction. The difficulty I could see in having hearings on it or moving it is that the gambling industry that exists would favor a prohibition on internet gambling, because it would compete with them, and they oppose the bill that I introduced, H.R. 2811, because it would put some reasonable constraints on their activities in order to deal with the problem of compulsive gambling.

    The fact that the gambling industry opposes my bill and favors our bill should not be a reason for considering only our bill on internet gambling. I would welcome any comments from today's witnesses on both H.R. 2811 and H.R. 4419.

    I have been concerned for many years with the expansion of high-stakes gambling and was the first House sponsor of legislation calling for the creation of a national commission to study the impact of the spread of gambling on individuals, families and communities. I introduced this bill after a number of hearings as then-Chairman of the Small Business Committee on the problems that gambling was causing to individuals and communities.

    Subsequent to the Republican takeover of the Congress, Congressman Frank Wolf became the principal sponsor of the same bill I had introduced in the prior Congress and I cosponsored with him, and that bill eventually then became the law of the land, and we have worked together to promote it.

    Gambling has become too widespread of a phenomenon in American society to simply eliminate it. However, we must instead focus our efforts on ways to mitigate its potential adverse consequences on America's families and communities.
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    Gambling can provide a tool for concentrating public and private investment and consumer spending to promote economic growth, as long as it is restricted to a very limited number of jurisdictions, but that is history. It is no longer restricted to a limited number of jurisdictions. It is now within an hour or two drive of virtually every community in America. It is now in virtually every room via the internet that exists within the United States of America. It is now with you when you take your laptop. There is noplace you can go now where you cannot engage in gambling.

    And when it expands virtually everywhere, this ability to concentrate economic resources is not diminished, it is lost. This is one of the problems with internet gambling. The potential negative aspects of gambling, such as excessive debt, bankruptcy, broken families, alcoholism and other problems, will be felt in communities in every part of our Nation without any community realizing any economic benefit or additional tax revenues to help offset these added social costs, because of this widespread utilization of gambling.

    In many instances, the economic benefits of internet gambling will go solely to website operators halfway around the world.

    H.R. 4419 offers, in my view, the realistic approach for restricting the expansion of internet gambling by restricting the electronic payments that make online betting and thus internet gambling possible. It cuts it off at its source, and I support this general approach and join the Chairman in sponsoring this legislation. I also recognize, though, there are a number of technical, legal and competitive issues that need to be resolved. But the fact that the internet is only beginning to evolve as an instrument of communication and commerce should not free it from all restriction or regulation. We must, of course, be circumspect and deliberate in whatever constraints we seek to impose on it.
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    I hope that the concerns expressed by today's witnesses can be addressed within the context of this legislation and that a workable and acceptable approach to the problem of internet gambling can be brought before the committee.

    I would also hope we would consider just as seriously H.R. 2811, which is recommended by the Commission. And I welcome each of today's witnesses and look forward to their remarks and recommendations.

    Chairman LEACH. Does anyone else seek recognition?

    Mrs. ROUKEMA. Yes, Mr. Chairman, and I will be short, and I will submit the full text of my remarks in the record.

    Chairman LEACH. Without objection, they will be placed in the record.

    Mrs. ROUKEMA. As you know, I am an original cosponsor of this legislation, and I concur with the statements that you made in your opening statement. I also believe it is important that Congress address this problem this year, rather than further delay in addressing the internet gambling problem. It is kind of like that old saying we'd better close the door before the horse is out of the barn, because the problems will only become more complex and more difficult to get ahold of in the future.

    I would like to say that certainly the international aspects of the question, that is, entities operating offshore, and the fact that internet gambling often involves money laundering, is the problem that I would like to focus on for just a minute.
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    I have devoted a significant amount of time—we have, I should say—a significant amount of time on the Banking Committee to the question of illegal money laundering activities. It is an issue that the Banking Committee must address in a variety of ways.

    It is also comes as no surprise that the report of the National Gambling Impact Study Commission that has been already referred to, and I believe Mr. Leone will be giving a report on that expanded report later in this hearing, which was released last year, states that internet gambling provides an easy means for money laundering. The report states, and I would like to quote: ''To launder money, a person need only deposit money into an offshore account, use those funds to gamble, lose a small percentage of the original funds, then cash out the remaining funds. Through the dual protection of encryption and anonymity, much of this activity can take place undetected.''

    I am very interested in how we can best address this problem and close any loopholes—the majority of loopholes that are out there.

    I also believe that the provisions instructing the U.S. executive directors of international financial institutions to oppose resources for any country with widespread internet gambling by U.S. citizens, that certainly would prove beneficial. Similarly, the provisions giving the Treasury—and I think this is very important—the provision giving the Treasury and the Federal Reserve the ability to limit access to the U.S. payment system by financial institutions chartered in countries with substantial internet gambling would seem to be a good basis for curtailing this activity. And certainly I am going to be interested in questioning and hearing the ideas from the Treasury and Justice Departments on these provisions.
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    Mr. Chairman, I would also like to note as just recently has been brought to my attention regarding the e-commerce parallel here, and as you know, I have been a strong supporter of e-commerce bill, and some have been saying—or some might argue that prohibiting certain kinds of transactions over the internet such as gambling is anti-e-commerce. Nothing could be further from the truth. The House and Senate have just passed and sent to the President the e-signature legislation. I was quite involved and a strong supporter, and today we are talking about gambling, not e-commerce, and I want that to be very explicit. It is well documented that millions of Americans have gambling problems, and we need to take strong action, but there is no conflict here between e-commerce, e-signature legislation and the legislation that we are having under consideration today.

    I thank the Chairman.

    Chairman LEACH. Thank you very much.

    Does anyone else seek recognition? If not, Ernie, we will begin with you, and we are delighted that you could join us. Our first witness is the Honorable Ernie Fletcher, who is a very well-respected Member of our body from the State of Kentucky. Please proceed.


    Mr. FLETCHER. Thank you, Mr. Chairman, and Mr. LaFalce and other Members of the committee, for this opportunity to testify before you. I appreciate your willingness to hold this hearing to discuss an issue that is critically important to my constituents in Kentucky and all of America, including New York, and New Jersey; over to California and down to Florida, and most of the States in this United States.
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    The internet knows no bounds. The World Wide Web can reach into every home, college campus, and community, making it difficult to enforce Federal and State laws related to gambling. The use of this unrestricted medium for gambling has turned prohibitions and regulations governing gaming upside down. The result has been an ever-increasing amount of internet wagering by unlicensed, unregulated and, in many cases, foreign operators. As we work to address the issue of criminal internet gambling activities in the United States, we need to make sure legitimate, licensed and regulated gaming operations, such as pari-mutuel horse wagering, are not negatively impacted.

    H.R. 4419, the Internet Gambling Funding Prohibition Act, would be extremely effective in combating illegal gambling by prohibiting the use of credit, electronic fund transfers and checks in internet gambling. This language would make it extremely difficult to transfer funds from the United States to foreign operators, the significant source of illegal and unregulated internet gambling activity.

    Unfortunately, the language as it stands would have far-reaching consequences beyond what I believe was contemplated by its authors. My concern is that the current language would also prohibit wagering by any other form than cash for currently legal and regulated forms of gambling, especially pari-mutuel horse racing. The horse racing industry would be unable to transact simulcast wagering and account wagering electronically, severely limiting ongoing activities. In essence, this legislation would prohibit activities that are lawful under existing Federal and State laws.

    Pari-mutuel horse racing is one of the oldest and most well-regulated forms of State-sanctioned gambling in this country. The Interstate Horse Racing Act of 1978 gave State regulatory authorities, racetracks, and horsemen the ability to control the practice of offtrack interstate wagering.
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    Congress specifically recognized that ''pari-mutuel horse racing is a significant industry that provides substantial revenue to the States,'' and that ''properly regulated and properly conducted interstate off-track wagering may contribute substantial benefits to the States and the horse racing industry.''

    Currently, 43 States allow pari-mutuel wagering on horse racing that is dependent on computers to transfer wagering information between regulated racetracks, off-track facilities, satellite wagering facilities, wagering hubs and homes. At the end of the day accounts must be settled, usually by check or electronic transfers. Furthermore, the racing industry is planning to use emerging e-commerce technology for automated computer networks for wagering systems as well as payment systems. All of these activities are regulated by States through the Interstate Horse Racing Act, yet House Resolution 4419 would criminalize this State-sanctioned enterprise, providing the same prohibition and punishment afforded an offshore, illegal, unregulated virtual gaming parlor.

    Pari-mutuel horse racing is vital to the economy of my district in central Kentucky. Those of you who have traveled through the Bluegrass State know that this is horse country with breeding farms, training facilities and racetracks that hold some of the Nation's most prestigious horse tracks and racing. Horse racing and the agribusiness it supports generates $3.4 billion to Kentucky's economy and supports 42,400 full-time jobs. Nationwide the industry has a $34 billion impact on the U.S. economy and provides 338,500 full-time jobs.

    Overall, pari-mutuel wagering generates 75 percent of the industry's revenue. It is estimated that the industry produces annual revenue of $500 million to governments in which pari-mutuel wagering is permitted. Severely limiting the funding mechanism for pari-mutuel wagering, as this legislation proposes, would paralyze the industry and be detrimental to Kentucky's economy and the economy of the Nation as a whole.
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    In conclusion, let me applaud you, Mr. Chairman, for addressing the problem of illegal and unregulated internet gambling. I support restricting the activities of these unlicensed, unregulated and foreign operators; however, we must not restrict practices that are lawful under existing Federal and State laws. I believe that State governments should continue to regulate State-sanctioned gaming and that the legislation before you today should be amended to take into account the ongoing activities by the pari-mutuel horse racing industry.

    This amendment is not about expanding gambling, this is about protecting an already existing industry and tradition. This is about an American tradition that has developed over the years and that is greatly needed and important for not only Kentucky's economy, but for the economy of the United States. And thank you, Mr. Chairman, Mr. LaFalce and Members, for allowing me this opportunity.

    Chairman LEACH. Let me thank you, Ernie, for your very thoughtful comments and perspective. We appreciate your testimony today.

    Does anyone have any questions?

    Mrs. Biggert.

    Mrs. BIGGERT. Thank you, Mr. Chairman. And it is nice to see one of our colleagues testifying here.

    You mentioned that the way that the betting, the pari-mutuel, is paid for could be either by check or electronic method right now, on the internet? It would seem to me that not very many people pay off by check; is that correct?
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    Mr. FLETCHER. I can't give you, Mrs. Biggert, the exact numbers on that, but I know that much of the industry—like I mentioned, 75 percent of the revenues come through a mechanism of pari-mutuel and electronic betting and transfers. I don't know the percentage that are done through credit, as you have mentioned, but we could get that number for you.

    Mrs. BIGGERT. It would seem that if this bill would limit payment, the only way to pay would be by cash or by check, which would be—particularly with the off-track betting, would create more problems—would destroy the industry doing that. Because waiting for a check, or people forgetting to send in the check, would cause more problems.

    Mr. FLETCHER. I think you are absolutely right, and if this bill could be amended to accommodate that understanding, I think it certainly would be a good piece of legislation. It would be helpful to prohibit the kind of activities and yet protect those that you have just mentioned.

    Mrs. BIGGERT. Thank you.

    Chairman LEACH. Thank you very much. And thank you.

    Mr. FLETCHER. Thank you, Mr. Chairman, for the opportunity.

    Chairman LEACH. Our second panel is Mr. Gregory A. Baer, Assistant Secretary for Financial Institutions, the Department of the Treasury; and Mr. Kevin V. DiGregory, Deputy Assistant Attorney, Crime Division, Department of Justice.
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    And we will begin with you, Mr. Baer, and welcome to the committee.


    Mr. BAER. Thank you, Mr. Chairman.

    Mr. Chairman, Ranking Member LaFalce and Members of the committee, thank you for the opportunity to present the Treasury Department's views on H.R. 4419, the Internet Gambling Funding Prohibition Act.

    One of the great benefits of the internet is that it links individuals and businesses in real-time across borders and oceans. It creates a single market where merchants and consumers can do business without having to incur the costs of meeting physically. It gives consumers greater access to information and democratizes access to quality products.

    With the myriad benefits of this connectivity, however, come some costs. Because the internet knows no boundaries, it knows no States. Except for the need to convert currency in the event of payment, the experience is no different on an American or Antiguan or Australian website.

    Today's hearing concerns one area where this issue is being vividly demonstrated: On-line gambling. As the internet has revolutionized many industries, it also has affected the gambling industry. A recent report found that as of January 2000, there were 650 internet gambling sites. In 1999, internet gambling revenue was $1.2 billion, an 80 percent increase over the year before.
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    No one can doubt the damage that gambling can do. For compulsive gamblers especially, the damage to themselves and their families can be profound. Thus we must be concerned by the ability of the internet to allow compulsive gamblers access, around-the-clock access, from home or the workplace. Internet casinos are already illegal in the United States, but have proliferated abroad.

    Preventing Americans from gambling at overseas internet casinos is difficult for both legal and practical reasons. Punishing the casino is difficult, because it activities are legal in the place it operates. Punishing the gambler would require identifying who is logging onto such sites, a task that would face profound privacy and civil liberty concerns as well as technological obstacles.

    H.R. 4419 provides an innovative alternative approach to limiting internet gambling. Still, the bill does present technological challenges and policy concerns that need to be considered further, including two enforcement provisions that the Treasury Department opposes. We believe, however, that these provisions are not central to the bill and could be removed without undermining its overall effectiveness.

    We look forward to working with the committee and its staff, as we have so many times in the past, to resolve these issues.

    Moving to the bill itself, H.R. 4419 is premised on the ability of actors in the payment system to identify and halt payments to internet casinos. Currently the majority of internet gambling transactions are conducted with credit cards. Based on our discussions with the industry, we believe that credit card companies can already identify and could probably refuse to authorize payments to internet gambling businesses. A credit card is, of course, only one payment mechanism, but it is by far the most important for online gambling.
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    First, use of credit cards presents special concerns, because gamblers are indebting themselves in order to gamble. Second, credit cards are the most frequently used payment mechanism. Casinos appear to prefer them for the speed with which gamblers can be registered and begin gambling. Gamblers prefer them for that reason, and also, because they can charge back in the event of fraud and can receive payment on winnings more quickly.

    The bill's restrictions would also apply to payments using offline debit cards, better known as check cards, and online debit cards, ATM cards. Currently almost all offline debit transactions are processed by two networks owned by the credit card associations and thus presumably could be identified as credit card payments. Online debit transactions generally are not used on the internet currently due to the problems of encrypting PIN numbers.

    Still there could be ways to avoid these payment restrictions. First, individuals could use electronic bill payment where the paying bank generally doesn't verify the identity of the payee. Second, some internet aggregators now accept deposits from consumers, which can come from the form of credit card payments and then allow the consumer to spend that money online. Third, there are numerous attempts underway to market electronic or digital currencies, stores of value that can be spent online in anonymous peer-to-peer transactions; that is, without involving the traditional payment system.

    Finally, all the credit card issuers have stressed to us that merchants can and will take measures to conceal the nature of their businesses, and while inconvenient and costly, nothing would prevent a gambler from sending a check to an internet casino via overnight mail.
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    While most of H.R. 4419 is directed to stopping payments to online casinos, it also contains sanctions designed to dissuade other nations from hosting such casinos. The Treasury Department strongly opposes these two provisions.

    First, the bill would require the Secretary of the Treasury to instruct the U.S. executive directors of each international financial institution to oppose any non-basic-human-need loan for any country that the Secretary determines is permitting gambling by American citizen. We believe that this provision would undermine the Administration's policy of focusing these institutions on their core missions, poverty reduction, economic growth, and the stabilization of global financial markets.

    Second, the bill would require the Secretary and the Federal Reserve to limit or preclude access to the U.S. payment system by financial institutions from countries that permit a high level of participation in internet gambling, even if those financial institutions themselves were uninvolved. This provision may raise questions with our trading partners concerning its consistency with U.S. obligations under existing international trade agreements.

    Mr. Chairman, thank you very much for the opportunity to appear before the committee today. We look forward to working with you to resolve the concerns raised by the Treasury Department and the Justice Department here today, and we look forward to answering any questions the committee may have.

    Chairman LEACH. Thank you.

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    Mr. DiGregory.


    Mr. DIGREGORY. Thank you, Mr. Chairman. It is a pleasure to be here this morning to comment on H.R. 4419, the Internet Gambling Funding Prohibition Act, which prohibits operators of gambling businesses from accepting payment in virtually any form but cash, no pun intended.

    We have some concerns. We support the goals of this bill. We understand and appreciate your concern about the alarming proliferation of internet gambling opportunities. In fact, the Department of Justice, particularly in the Criminal Division and in U.S. attorneys' offices around the country, we are troubled for three reasons. There is a greater potential for fraud with respect to internet gambling than there is with respect to traditional gambling. That is because the internet is both instantaneous and anonymous, and it makes it very difficult for investigators and prosecutors to track those who would perpetrate these fraudulent activities.

    Second, because of opportunity and availability, we are concerned about the proliferation of internet gambling. Access to the internet is incredibly widespread. Any place, any time, anyone can obtain access. This is particularly a problem with respect to compulsive gamblers. Compulsive gamblers' access to internet gambling can lead to financial devastation for them and their families. We are concerned about the proliferation of internet gambling, because of anonymity and availability. There is an inability, Mr. Chairman, we believe, to ensure that minors will not have access to internet gambling.
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    One attempt to address the problem of internet gambling has already been made and is before the Congress, and that is H.R. 3125. The Justice Department and the Administration have opposed H.R. 3125 because, first, we believe it expands gambling opportunities; second, we believe it is inconsistent with current Federal law; and finally, we believe it is not technology-neutral and should be.

    We are pleased that H.R. 4419, unlike H.R. 3125, does not exempt the horse racing industry, the dog racing industry, and the jai alai industry; that its prohibitions, those exemptions in H.R. 3125, we believe, are inconsistent with current Federal gambling law.

    This inconsistency in H.R. 3125 exposes what we believe to be another weakness, and that is that H.R. 3125 is not technology-neutral. It would apply specific and different rules to the internet.

    We are concerned that H.R. 4419 suffers from this same weakness, and I will explain. We encourage the Congress with respect to any criminal prohibitions that it wishes to enact, that when it does so, it focus on the conduct that it seeks to prohibit and not on the medium used to perpetrate that conduct. Legislative treatment of payment for gambling, we believe, should be consistent with current law and should be technology-neutral. Your legislation, we respectfully recommend, should be applied to illegal gambling, whether that gambling occurs over the telephone, or whether that gambling occurs over the internet, or whether that gambling occurs in any other way.

    Finally, we would recommend to the Members of Congress that they amend existing Federal gambling law so that we can best meet the challenge posed not only by the use of the internet to perpetrate this kind of criminal conduct, but the challenge posed by any technology, past, present, or future, which may be used to perpetrate this kind of criminal conduct.
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    We would recommend the amendment of 18 United States Code 1084. 1084 currently prohibits the use of a wire communication facility to transmit bets or wagers or information assisting in the transmission of bets or wagers interstate on sporting events or contests. We would like to see 1084 clarified so that it applies to all forms of betting. We would like to see 1084 updated so that it applies to any and not just wire communication facilities. We would also like to see 1084 amended to ensure that existing protections from liability given common carriers who deny services to gambling businesses upon notice to law enforcement—we would like to see that protection from liability provided to any persons, including ISPs, required to terminate a customer's service because they are engaging in a gambling business.

    Our proposed amendments would not prohibit any gambling currently permitted, nor would it permit anything currently prohibited. We would welcome the opportunity to work with you to determine whether our approaches complement each other to effectively combat the problem of internet gambling. I believe they do, and once again, I would suggest to you that we welcome the opportunity to work with you on that. I would also be happy to answer any questions or attempt to answer any questions that you have this morning.

    Chairman LEACH. Let me thank you both very much. Your testimony is very thoughtful and constructive, and we will certainly take your all of your views into consideration.

    Let me first, though, just ask Mr. Baer this question. I realize there is always frustration at the Treasury with any restraints that go to the international financial institutions. But there is also an aspect of concern in this area, which is how do you limit foreign entities getting aggressive in this particular area? And we are seeing a number.
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    Do you have alternatives to the approach that we have laid on the table, or are you simply not preferring these alternatives?

    Mr. BAER. Mr. Chairman, as I was trying to stress, we believe that the underlying—the majority part of your bill, which is an attempt to restrict payments to those overseas casinos, is an innovative and good approach, and we think that is an approach that you may wish to pursue. If that approach is successful, then the need for restrictions on our ability to work with international financial institution would be diminished, and we think that would be worth giving a try before we turn to the more dramatic step of talking about the international financial institutions.

    Our concern there is just that these institutions—and we have really tried to focus them and should be focused on economic development, poverty, and global financial markets. And we would hate to see that focus changed by the United States or, for that matter, for any other country that may have its own particular concerns and desires to use the IFIs for those purposes.

    Chairman LEACH. Putting the IFIs aside for a second, what about the restraints on access to our country's banking system of countries that give a green light to internet gambling?

    Mr. BAER. There, Mr. Chairman, as we understand the provision in the bill, it would not sanction just financial institutions in foreign countries that are themselves in any way culpable in internet gambling. It would apply to any financial institution in a country if the Secretary certified that that nation's government or its casinos were not doing enough to stop internet gambling. We have consulted with our international relations folks at Treasury, and they have expressed serious concerns that this could be viewed by our trading partners as inconsistent with existing international treaty obligations of the United States.
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    Again, we would have concerns that other nations might view this as a potential enforcement mechanism if they were dissatisfied with how U.S. websites were peddling certain goods to citizens of their country.

    Chairman LEACH. Do you have alternatives?

    Mr. BAER. As I said, Mr. Chairman, we believe that the bill itself has an alternative, that the idea of pursuing blockage of payment to these foreign countries is something that should be looked at and pursued, and that is something that we have been and continue to be willing to work with your staff on in order to perfect that part of the bill and tackle some of the technological issues.

    Chairman LEACH. Thank you.

    Mr. LaFalce.

    Mr. LAFALCE. Yes. Mr. Baer, have you had an opportunity to review the legislation I introduced last year that would make a modest, but very important change with regard to electronic payments for gambling by removing credit card and debit card devices from gambling tables or from the immediate vicinity of gambling tables? Has Treasury reviewed my bill? And does it have any position?

    Mr. BAER. Congressman, we have not reviewed the bill in detail throughout the Administration, but I can say that Treasury certainly supports your goal of limiting this type of activity.
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    Sitting at a gambling table is a uniquely poor place to make a decision about whether to borrow money. People do not tend to reach for the credit card machine if they are on a winning streak; they only do so if they are on a losing streak, and that would probably, we believe, be an ideal time for a pause and some reflection and some consideration about whether that is a good time to borrow money.

    I guess past practice had been that that pause had to be at least long enough to go out to the lobby of the casino. That seems to us to be a pretty wise step.

    Mr. LAFALCE. Right. It wouldn't prohibit them in the lobby of the casino, but at least it would make you leave the table and go out to that lobby. I hope our committee will consider that issue that is within our jurisdiction.

    Mr. Baer, one of today's witnesses has suggested that an alternative way to restrict payments to internet gambling sites, particularly those overseas, is simply to declare that gambling debts incurred in internet gambling would not be collectable in the United States. Is such an approach feasible or enforceable?

    Mr. BAER. It would certainly be feasible and enforceable. I think the question would be whether it would be a step too far. In effect, that is depriving the bank or the credit card company of funds, not the gambler him or herself. So we think we need——

    Mr. LAFALCE. If they knew that, they might just cease.
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    Mr. BAER. It would certainly be a back-door method of basically prohibiting any of this activity. We think of it probably as a first step, that something along the lines of what is in H.R. 4419 would be less restrictive and perhaps as much effective.

    Mr. LAFALCE. Mr. DiGregory, the Justice Department has taken the position that most forms of interstate internet gambling are already illegal under the Interstate Wire Act; is that correct so far?

    Mr. DIGREGORY. Correct so far.

    Mr. LAFALCE. And that considerable litigating authority is also available to use against internet gambling operators. Now, if that is true, why have we not seen more actions brought by the Justice Department against internet sites?

    Mr. DIGREGORY. There have been actions brought, as I am sure you are aware. There was one particular case in your State.

    Mr. LAFALCE. The question is why not more?

    Mr. DIGREGORY. I think a combination of lack of resources and priorities within certain Federal districts and within the Justice Department. We have only so many resources and so many prosecutors to spread around.

    Mr. LAFALCE. I think that is a good answer. Would we have to increase our resources 100 percent, 1,000 percent, 10,000 percent in order to do a job under existing law, or, because of the inability to come up with the additional resources needed, do we need a new legislative approach? The first question is if we just proceeded under existing law, what would the increase in human resources be?
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    Mr. DIGREGORY. I think—my answer, I guess——

    Mr. LAFALCE. My guess would be at least 1,000 percent, if not 10,000 percent.

    Mr. DIGREGORY. You would need a substantial increase in resources if you were to prioritize as a 1, 2 or 3 priority this particular problem throughout the country or even in several districts around the country.

    Mr. LAFALCE. Yes. OK. Well, that goes to the question of prioritization, and one of the difficulties is if, given all the other crimes you must deal with, this is not a high priority, then the Congress must make it a high priority by its legislation, because we are now talking about going into every lap of every teenager, of every human being in the United States of America. That is what we are talking about. We are talking about something that virtually knows no bounds. And it is in its embryonic stages, and we either cut it off at its source now, or it will be out of control, if it is not out of control already. I caution you on that.

    In your testimony you propose that the legislation be revised to prohibit the use of financial instruments and systems only in connection with illegal gambling. I have some problems with that. Given the fact that internet sites can originate from anywhere, and access is unrestricted, how are consumers or card issuers or payment networks to distinguish legal from illegal sites and legal from illegal payments?

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    Mr. DIGREGORY. Well, with respect to the current Federal law, as you have noted, although we do desire amendments to the Wire Act, to 1084, we believe that these internet gambling sites, if they meet the definitions of 1084, if they meet the definitions of 1955 and 1952—55, which defines the predicates for whether or not you are running a gambling business—they are in violation of Federal law. They are illegal.

    Mr. LAFALCE. All of them? I mean, how are you going to distinguish between the legal from the illegal?

    Mr. DIGREGORY. I think the only possible——

    Mr. LAFALCE. My concern about 1084, that is not our committee. That is another committee, and another committee might create so many exceptions that a new bill might be worse than existing law. I have much more confidence in Mr. Leach and myself. I mean, really.

    Chairman LEACH. If the gentleman will yield, I have a great deal of confidence in you. My wife has doubts about the other guy.

    Mr. LAFALCE. Mr. Leach, I am in a very generous mood today.

    Mr. DIGREGORY. If I may, if you prohibited the use of credit cards and other financial instruments with respect to internet gambling, then you would have an inconsistency with current Federal law with respect to other forms of gambling. If the legal gambling that is going on over the telephone, that legal gambling——
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    Mr. LAFALCE. Could you elaborate a bit more on the distinction you draw between the use of the internet to make direct wagers that might be illegal and the use of the internet to conduct telephone conversations for purposes of making a bet that may be legal? I have difficulty seeing the difference.

    Mr. DIGREGORY. If the call is made, if the bet is made intrastate, so long as that gambling is legal in the State, there is no violation of Federal law whether the call is placed using internet telephony or any the call is placed using standard telephony.

    Mr. LAFALCE. So is the issue one of intra as opposed to inter? I mean, Congress can only act if it is inter. So I don't think that is a good answer. That goes to the constitutional competency of Congress to act. It does not go to the wisdom of our action. I would make a judgment that it is almost impossible to use a credit card without involving interstate commerce in some way. That would seem to undermine your argument.

    Mr. DIGREGORY. Well, I am——

    Mr. LAFALCE. Well, let's think it over.

    Did you go to the internet and go to Map Quest and follow the route of H.R. 3125?

    Mr. DIGREGORY. I can't say that I have followed it on Map Quest on the internet, but I have been trying to keep track of it since its introduction and the introduction of Senator Kyl's bill in the Senate.
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    Mr. LAFALCE. Do you think it got lost along the way somehow?

    Mr. DIGREGORY. We have expressed our concerns about the exemptions for certain types of gambling that have been added along the way.

    Mr. LAFALCE. OK. I want to make sure that we don't get lost along the way, and the first thing I want to make sure that we don't get lost is that we have our eye just on one player when we should have our eye on at least two players. And by that I mean not only internet gambling, but I am talking about keeping our eye on gambling establishments and the use of credit or debit cards in the immediate vicinity of those gambling tables. That is another player we have to keep our eye on. Any thoughts on that, Mr. DiGregory?

    Mr. DIGREGORY. I must tell you I have not reviewed your bill, but if the goal is to keep gamblers from having ready access to cash at the tables while they are losing, it would seem to be consistent with our view that we should do what we can to keep compulsive gamblers from having——

    Mr. LAFALCE. Let me ask you this: Was there any working group within the Clinton Administration, most especially within Treasury and Justice, that reviewed the recommendations of the national commission and came up with some judgment on those recommendations, most specifically those recommendations that would fall within the purview of our committee? And if you did, what were your thoughts? And if you had favorable dispositions toward those thoughts, why did the Administration not prepare its own bill for us to introduce?

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    Mr. DIGREGORY. There were working group discussion regarding internet gambling.

    Mr. LAFALCE. What working group?

    Mr. DIGREGORY. Well, there was discussion among Administration officials from all concerned departments regarding internet gambling.

    Mr. LAFALCE. Just internet gambling? What about the other recommendations within the purview of our committee?

    Mr. DIGREGORY. We talked about the National Gambling Impact Study Commission, as I recall our discussion, and the only recommendation, if you will, and I use that term loosely, that came out of those discussions was the proposal that I have mentioned to you this morning regarding the amendment of 1084.

    Mr. LAFALCE. If the Commission had made other recommendations, why didn't you come to closure one way or the other on the other recommendations that did not have to do with 1084?

    Mr. DIGREGORY. That is a question I cannot answer, I am sorry.

    Mr. LAFALCE. I think the Administration has been remiss to that extent.

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    I thank the Chair.

    Chairman LEACH. Mrs. Roukema.

    Mrs. ROUKEMA. Well, I want to share with this panel the fact that I am equally appalled as the Chairman and the Ranking Member are. It sounds to me as though you are in denial here. I am really almost shocked that you have not been more specific in acknowledging that there is a problem here, and your denial—particularly Treasury, you are not for anything in the bill, but there is no realistic way that you have indicated that we can address it. Again, you are in denial, it seems to me.

    Justice Department, Mr. DiGregory, at least has offered the alternative of amending 1084, but you were not specific about any way that that can be done and how soon it should be done.

    I just cannot believe that, as Mr. LaFalce has said in another form, that the Administration is sitting back and letting things drift dangerously and specifically—and this is what I was going to get to also, but you are already in denial on that as far as the National Gambling Impact Study Commission. They are going to be testifying later. I really don't understand. In other words, you are saying we do nothing? Mr. DiGregory, do you want to respond, please, with some specificity, if you will?

    Mr. DIGREGORY. I have specific language, specific proposal, to amend 1084. Not only does this specific proposal recommend that certain findings be made with respect to the proliferation of internet gambling, it also has draft commentary with respect to those particular amendments to 1084 that we recommend.
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    I highlighted this proposal in my oral statement this morning.

    Mrs. ROUKEMA. Well, I don't know, I thought I was listening carefully, and I thought I was listening carefully to your answer to Mr. LaFalce. I didn't find anything that had that specificity, but we will look at the full statement there, but I didn't hear the specificity.

    Mr. Baer, would you like to respond, because I am particularly troubled by your statement that there seems to be no realistic curtailment of the internet gambling on the proposal that you outlined.

    Mr. BAER. I think there are significant aspects of H.R. 4419 that we believe are an innovative and good approach to this problem. I want to make that clear.

    The two provisions to which we have lodged objections we believe are not central to the bill and are not necessary.

    Mrs. ROUKEMA. They are the enforcement mechanisms. If you don't have enforcement, how do you have legislation?

    Mr. BAER. The bill does contain an enforcement mechanism other than taking action against foreign nations or insured or other depository organizations in those nations. The other enforcement mechanism, I think it is the Justice Department or any Federal regulator can order a payment system processor to block a payment to a site identified as an internet gambling site, provided that there is the technology to identify sites as such. That can be a workable mechanism. What we have attempted to identify for the committee, and to educate ourselves, is to what extent that technology exists. I think what we have indicated is with respect to the credit card industry, and with regard to offline debit, that technology is either here or could be here.
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    And those are the areas that are the most important, because those are the types of payments that are generally used to make internet gambling payments. Certainly in this area it is going to be very difficult to do any completely effective legislation with respect to how people are paid over the internet. I will not hide the ball on that.

    Mrs. ROUKEMA. Repeat that again, please?

    Mr. BAER. Any legislation restricting how people are going to get paid in the future is going to be very difficult. That is not just true just with respect to internet gambling; that is with respect to anything. We are seeing a revolution in payments in this country, and we are seeing a move to online, anonymous payment mechanisms akin to cash.

    The reason money laundering has always been a problem in the offline world is that it is difficult to track cash. We will see it eventually, if you are not seeing it already, similar problems online. Any attempt to restrict payments is going to run into some problems; however, that is not a reason to throw up one's hands and give up. As I have noted with respect to the predominant means of payment for internet gambling, credit cards and perhaps offline debit, this bill can, we think, be a workable approach. Whether it will be a workable approach ten years from now, who knows? Nobody knows anything about what the world is going to look like in ten years, but that is why we are willing to work with the Chairman and the rest of the committee to try to turn this into a reasonable and workable approach.

    Mrs. ROUKEMA. Well, I am sorry we have not found more common ground here, but we will keep working the problem. But, again, I just feel as though you are in denial here as far as a workable way of attacking the problem now before it is so far out of control that we will never put the horse back in the barn again. And I am deeply concerned about it. I thought we would have more common ground.
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    Chairman LEACH. Will the gentlelady yield?

    Mrs. ROUKEMA. Yes, please.

    Chairman LEACH. I think there is kind of some attitudinal and substantive clarification that has to be made here. Am I not correct that both the United States Treasury and the United States Justice Department basically favor the framework we are going forth with, but with adjustments? That is correct?

    Mr. DIGREGORY. That is correct.

    Mr. BAER. I think that is fair to say, yes.

    Chairman LEACH. And second, as Mr. LaFalce has indicated, that neither the Treasury nor the Justice Department came forth with any recommendations in this precise area of banking regulation; is that correct?

    Mr. DIGREGORY. I think that is right, too.

    Chairman LEACH. The reason I stress this is the Executive Branch appointed a commission of first-class dimension, and as Mr. LaFalce has indicated, not a lot was done with that. And it is our view, having looked at the issues that relate to the statute that Treasury or that Justice Department has indicated, that there are much more compelling tightening prospects in the banking area than in the Judiciary Committee area. And, therefore, it is our view that we take a complementary approach. We are not trying to preempt anyone. We are trying to be consistent with judiciary actions, and we are also trying to take as much good judgment from the Executive Branch, both the Treasury and the Justice Department, as we can.
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    But the thing I would like to lay on the table as carefully as I can is that you both are in favor in general of moving in this direction, and that is clear-cut; is that not right?

    Mr. BAER. Yes, Mr. Chairman.

    Mr. DIGREGORY. That is right.

    Mr. LAFALCE. Could we augment that? You are also in favor, as I understand it, Mr. Baer, of moving in the direction of the bill I had introduced last year dealing with the nonuse of credit or debit cards at the gambling tables or immediate vicinity.

    Mr. BAER. We haven't completed a formal Administration position or view of the bill, so I would have to be hesitant there, but I think both I and Mr. DiGregory have indicated that this is the sort of activity that tends to foster compulsive gambling and which we have generally in the past—about which we have had serious reservations. The activity, not the legislation.

    Mr. LAFALCE. And it, too, is within our jurisdiction and is a Commission recommendation despite the fact that the gambling industry opposes my bill, although the gambling industry favors the bill that both of us have introduced.

    Mr. BAER. I think that is correct, it was a gambling commission recommendation. In some ways it is akin to the internet gambling, because one of the concerns about internet gambling is that a compulsive gambler has real-time access to gambling, and especially through credit, and the same would be true if you were at a casino and the credit card machine was one swipe away.
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    Chairman LEACH. Ms. Waters.

    Ms. WATERS. Mr. Chairman, first, let me apologize for being late to the hearing. As you know, we have all of our art students on Capitol Hill today from my district with their parents, and they expect to see us, and they are over in Cannon, and all of you have to go if you have not gone.

    I don't know what has taken place up to this point. Was there a discussion of what took place in the Judiciary Committee with the whole issue of gambling on the internet, Mr. Chairman?

    Chairman LEACH. Not a great deal of discussion, so please proceed.

    Ms. WATERS. I would like to—and I don't know who even is at the table. I would like to ask the gentlemen at the table if you are aware of what took place in the Judiciary Committee with gambling on the internet? Are you aware of the bill that came out of the Judiciary Committee?

    Mr. DIGREGORY. Yes.

    Ms. WATERS. Would you describe that as a bill that contains gambling on the internet except for one industry?

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    Mr. DIGREGORY. No, I would not. If you characterize—and I am Kevin DiGregory from the Justice Department. Pleased to make your acquaintance.

    I would not, because if you want to lump together jai alai, horse racing and dog racing as the pari-mutuel industry, then I guess one could make an argument that gambling is contained to those industries.

    We would make the argument, and we had made the argument before the Judiciary Committee, that the Internet Gambling Prohibition Act, H.R. 3125, introduced by Congressman Goodlatte, is one which would actually expand gambling opportunities, because it would, one, allow to you do online what you cannot do over the telephone with respect to all three of those segments of the pari-mutuel industry.

    Ms. WATERS. What is the Justice Department's position on the Judiciary legislation?

    Mr. DIGREGORY. We are opposed to it because of those exemptions, and because we believe it is inconsistent with current Federal law, and that it is not technology-neutral. I mentioned earlier that we believe, with respect to the legislation of any criminal conduct, one should focus on the conduct and not on the medium used to perpetrate the conduct. And I have transmitted a proposal that we made to amend current Federal law so that it is technologically neutral and that it meets what we believe to be our needs in facing the challenge of new technologies like the internet.

    Ms. WATERS. So am I to understand——
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    Chairman LEACH. Would the gentlewoman yield on this point a second?

    Ms. WATERS. Yes.

    Chairman LEACH. This proposal that you transmitted, does it only modify law outside of this committee's jurisdiction?

    Mr. DIGREGORY. It only modifies 18 United States Code 1084, which I understand is outside the committee's jurisdiction.

    Chairman LEACH. Have you focused at the Justice Department on this particular act in terms of recommending changes that you think would be precisely helpful?

    Mr. DIGREGORY. On H.R. 4419?

    Chairman LEACH. Yes.

    Mr. DIGREGORY. Yes, we have, and one of the changes we mentioned today was that it apply to illegal gambling, and that it apply not only to internet gambling, but to gambling, period, regardless of the method of communication used to perpetrate the gambling.

    Chairman LEACH. Thank you.
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    Ms. WATERS. Thank you very much, Mr. Chairman.

    Am I to understand that the Justice Department is opposed to gambling on the internet in any shape, form or fashion?

    Mr. DIGREGORY. We are opposed to interstate gambling on the internet in any shape, form or fashion. We are opposed to any gambling on the internet which would be inconsistent with gambling prohibitions under current Federal law.

    Ms. WATERS. And under current Federal law there are no provisions for interstate gambling, period?

    Mr. DIGREGORY. The only provision that speaks—well, there are several provisions which speak to the issue, and the only exemption that exists in current Federal law with respect to gambling is with respect to gambling information, information assisting in the transmission of bets or wagers over a wire communication facility between two States where gambling on that particular event is legal. So you can't transmit the bet or the wager interstate between two States where the gambling is legal, but you can transmit information assisting bets or wagers between those two States where the event is legal.

    Ms. WATERS. If the Chairman would allow me just to pursue this for a few minutes so that I can understand.

    DiGregory, is that your name?
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    Mr. DIGREGORY. Yes.

    Ms. WATERS. Mr. DiGregory, at the time that the bill was taken up in the Judiciary Committee, another issue surfaced, and that issue had to do with access within the pari-mutuel betting. And that issue, as it has been described to me, and I thought that I was creating some fairness, but now I am not so sure, is that the pari-mutuel betting that was allowed in the bill coming out of Judiciary Committee allowed for the major tracks in the United States to basically control betting, and they have signals that they could close out others who were trying to provide some of the information that you just described that is legal. Are you familiar with that aspect of the bill?

    Mr. DIGREGORY. What I am familiar with is that the bill provides through the use of a so-called ''closed loop subscriber system'' the ability for someone to place a bet from their home, let's say in Maryland or the District of Columbia, on a race that may be taking place in California.

    Ms. WATERS. And do you understand that that betting could take place through any number of ways; that it could take place, I guess, in some system that is coming directly from the racetrack itself, or there could be other systems that could interact in some way if they had access to the loop or the signal?

    Mr. DIGREGORY. I am not sure that I understand exactly how all of the mechanisms work that are used by the tracks. The position that we took with respect to this bill was, because the closed loop subscriber system used the internet for the placement of bets, and, because the use of the internet allowing a person to place a bet from his or her home with a betting operation in another State would be inconsistent with current Federal law with respect to the use of the telephone, we opposed that provision for that and other reasons.
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    Ms. WATERS. Are you familiar with a company or companies known as UBet?

    Mr. DIGREGORY. Yes.

    Ms. WATERS. Do you understand what the discussion was in relationship to UBet and companies like UBet and the closed loop system?

    Mr. DIGREGORY. I was not in the room when those discussions were held, but I would be glad to hear what you have got to say with respect to those discussions. I have tried to familiarize myself with the UBet.com operation, and from what I understand, you can subscribe to UBet.com, and they will send you a piece of software, and you can then become a subscriber to their system.

    Ms. WATERS. Well, what I understood coming out of that committee, that UBet and other operations like UBet have been effectively closed out of the system that we allowed to come out of the Judiciary Committee, the closed loop system, and that there is a question about access. If, in fact, we are going to allow the pari-mutuel internet betting, whether or not they would have like a monopoly or whether or not these other small companies like UBet would be able to use it. Do you understand any of that?

    Mr. DIGREGORY. I do not recall being specifically aware of a discussion regarding whether anyone would have a monopoly.

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    Ms. WATERS. Do you have anyone with you that could illuminate this whole discussion with UBet and the closed loop system?

    Mr. DIGREGORY. Well it depends on what you want to discuss about UBet. I do know that UBet left California by virtue of a consent decree with California, I believe it was the California Attorney General's Office, because there was a concern about what UBet was doing in California being illegal.

    Ms. WATERS. Would you, Mr. DiGregory, please come to my office and discuss that with me so that I can understand whether or not this is a discussion about access or whether something else is going on?

    Mr. DIGREGORY. OK. I will be glad to.

    Ms. WATERS. Thank you.

    Chairman LEACH. Mr. Sweeney.

    Mr. SWEENEY. Thank you, Mr. Chairman. I want to thank Mr. DiGregory and Mr. Baer for their testimony. I also want to thank them for their assistance.

    As you know, I am in support of the overall intent of H.R. 4419; however, I do have concerns with its effect and would ask or hope to seek that we limit its effect on prohibitions to just illegal operations.

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    I am particularly concerned about the potential impact on the horse racing industry, which operates legal wagering operations in 43 States including New York, and if I could be a little parochial, one of the most popular horse tracks in the Nation is located in Saratoga Springs within my congressional district. It has significant impact on our economy. Saratoga does about $50 million in tourism annually, 25 percent of which is generated during the racing season. So I am cautious about any legislation which would negatively impact the economic well-being of Saratoga or any other horse racing location.

    And as you know, Mr. DiGregory, the Interstate Horse Racing Act of 1978 recognized the rights of States to sanction and license businesses to forge interstate relationships for interstate off-track betting and to further the horse racing industry and legal off-track betting industries throughout the United States.

    That having been said, I know you are familiar with my proposal to narrow H.R. 4419 to apply solely to financial transactions associated with unlawful gambling activity. And I would like to hear your positions, some of your statements, for the record about that proposal and about the limitations to illegal operations solely.

    Mr. DIGREGORY. In the testimony that I presented orally and in both the written testimony, we have recommended that the bill be limited in scope to apply to illegal gambling operations. We have also recommended that the bill be broadened in scope to apply to all illegal gambling operations, not just illegal gambling operations which use the internet.

    Mr. SWEENEY. Thank you.

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    Chairman LEACH. Thank you, John.

    Mrs. Maloney.

    Mrs. MALONEY. Thank you, Mr. Chairman, and I want to thank our panel for appearing here today.

    One of the reasons that the committee is facing the problem of internet gambling is because the internet has been so tremendously successful. As one of you testified earlier, it is literally transforming our economy and changing the way that we live.

    Early-on, the Administration recognized that the best way to treat this quickly changing technology was to basically stay out of the way, and this has been a proven success. Any attempt to regulate the internet or limit any type of commerce conducted with the Net must be carefully constructed to avoid unintended consequences.

    I strongly agree with the goal of the Chairman's bill to eliminate internet gambling, and I also support the Ranking committee Member's bill to really bar ATM, credit and debit cards from being placed on the table, and I hope the Chairman will have a hearing on his bill later on.

    I represent Silicon Alley, and the internet and the new technology has been incredibly important on a whole number of levels and in my district, in job employment and expansion. So I am concerned, would this bill interfere with the Administration's policy of not regulating the internet? Is this the first step toward internet regulation?
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    Mr. BAER. Actually I think Mrs. Roukema early-on referred to the electronic signature bill, which has now passed both Houses and which I and many folks in the Administration have spent most of this year on. I think you are correct. We are absolutely committed to making sure that the internet works for business and consumers and do not want to do anything to diminish the effects that it can have for our economy, which is now I guess our new economy.

    We do not believe that H.R. 4419 would have that effect. It would limit payments for a specific purpose to certain identified persons. Anything, of course, taken to its extreme can be extreme. But we see nothing in the bill as currently drafted with respect to limiting payments that we think would interfere with the internet economy. It would block payments mostly to foreign casinos where other efforts to enforce our laws have thus far proven relatively ineffective.

    Mrs. MALONEY. This legislation also includes a sense of Congress call on the U.S. to encourage other countries to enact internet gambling bans. Have other countries passed such measures?

    Mr. DIGREGORY. I believe there is a moratorium currently on internet gambling in Australia. If my memory serves me, Australia was one of the first governments to license through its state governments internet gambling websites. And if my memory serves me, there is currently a moratorium on the operation of such websites in Australia.

    Mrs. MALONEY. How effective do you believe the legislation will be without cooperation internationally?
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    Mr. BAER. In a way the legislation is necessary predicated on the fact that cooperation internationally will not eventually be completely effective. What you see is as you look—having spent now the past few days actually surfing on the internet and going to internet gambling sites, you see them proliferating in the Caribbean and other places, some places that you have never heard of. And there will always be the opportunity to go to even the lowest common denominator, go to the fewest restrictions. If there is a moratorium in Australia, you move to somewhere else.

    The intent of H.R. 4419 is to say that no matter where it goes, we should try to lock payment from U.S. citizens to those sites.

    Mr. DIGREGORY. Because the legislation prohibits gambling businesses from using these payment mechanisms, because it criminally prohibits them, whether they are offshore businesses or not—if they do business in the United States and do business by accepting credit card payments from United States citizens, they would fall within the prohibition and would be prosecutable. The question then becomes whether or not we could ever get our hands on them to prosecute them because they are offshore or overseas.

    Mrs. MALONEY. Thank you very much.

    Chairman LEACH. Mrs. Biggert.

    Mrs. BIGGERT. Thank you, Mr. Chairman.

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    Mr. Baer, in your testimony you mentioned the provision Section 4(c) requiring the Secretary of the Treasury and the Federal Reserve to take action, and then you raised the question about our trading partners and international trade agreements. Do you think that there is a chance that this would put us in jeopardy within the WTO and the laws that we as a country abide by, as do 134 other countries?

    Mr. BAER. As I said in the testimony, we have some concerns that our trading partners could view this provision as inconsistent with the obligation of the United States under international treaties and including, I think, the WTO.

    Mrs. BIGGERT. Would there be a way to fix that, or is it something that other countries could just maintain is a violation?

    Mr. BAER. I want to be hesitant here, because one never wants to be too definite when it comes to any issue of international relations, specifically when one works in domestic finance. But we would certainly be willing to work with the committee if there were ways to improve the provisions so as to not raise these concerns. Whether that is possible, I can't tell right now.

    Mrs. BIGGERT. And then another question that has come up, I think people have talked about, is the enforcement provisions. Could you explain what these enforcement provisions are in the bill? And do you think they are strong enough for any action if there is illegal activity?

    Mr. BAER. Leaving aside the international enforcement provisions, which are the ones we have the problems with, as we understand the Chairman's bill, and the idea is that there will be a way, either because they learn themselves of the identity of the payee or because the Government tells them, for payment system processors—be it payment, credit, debit, whatever—know that that payment is going to someone identified as internet gaming, casino, sports book, whatever they call it, and there would then be the power with the Government, be it the Justice Department or the banking agencies, to order such payments either to a particular site or company or to all such sites or companies not to make those payments.
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    As we understand it, certainly the major credit card associations have developed means of using merchant codes to identify what type of business a given merchant is in. And I think what the bill tries to do is to build on that sort of knowledge base and use that as a way of stopping these payments.

    Mrs. BIGGERT. And you think that would be sufficient?

    Mr. BAER. We think it is certainly a good step. Whether it would be 100 percent effective—as I was saying to Mrs. Roukema earlier, one can never be 100 percent effective when it comes to internet payments, but in the credit card area that this could be an effective step.

    Mrs. BIGGERT. Mr. DiGregory, do you have anything to add to that?

    Mr. DIGREGORY. No, thank you.

    Mrs. BIGGERT. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman.
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    I am just trying to figure out the practical impact of this bill and how it differs from the bill that we considered in the Judiciary Committee. Do I understand correctly that under this bill, one could still engage in internet gambling if they paid in cash? They would have to pay in cash?

    Mr. BAER. Let me ask to turn over to Mr. DiGregory as to what current law is. This restricts certain types of payment mechanisms which I do not believe include cash. That is not to say it isn't illegal under current law.

    Mr. DIGREGORY. You cannot pay cash to make an illegal bet or take an illegal bet under some circumstances——

    Mr. WATT. But, this says you can't use credit cards or checks or drafts or similar instruments even to do a legal bet; is that correct?

    Mr. DIGREGORY. That is what we understand, yes.

    Mr. WATT. And how is that different from the bill that was considered in the Judiciary Committee? What would this cover that the Judiciary Committee's bill would not cover? Or vice versa, what would the Judiciary Committee's bill cover that this bill would not cover?

    Mr. DIGREGORY. Well, the Judiciary Committee bill didn't speak to the specific issue that you mentioned. And if the Judiciary Committee bill were enacted as currently constituted, and if this bill were enacted as currently constituted, you would have a situation—if I recall the Judiciary bill correctly, you would have a situation where internet gambling with respect to horse racing and dog racing and jai alai would be permissible, but you would not be able to use your credit card or the other financial instruments outlined in this bill. Those gambling businesses would not be able to accept payment in the form of credit cards or other financial instruments.
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    Mr. WATT. Let's take the jai alai, all of those exceptions out, pari-mutuel industry. The Judiciary Committee bill prohibits internet gambling; is that correct?

    Mr. DIGREGORY. It prohibits while—as we have pointed out—creating many exceptions.

    Mr. WATT. But I am taking those exceptions out. Except for those exceptions, the Judiciary Committee bill prohibits internet gambling?

    Mr. DIGREGORY. I believe that is right, and I am trying in the back of my mind to recall what it did with respect to State lotteries, because at one point I know there existed an exception for State lotteries as well.

    Mr. WATT. Would this bill apply to State lotteries?

    Mr. DIGREGORY. If State lotteries engaged in internet gambling, I don't see how it could not apply to their ability to accept credit card payments.

    Mr. WATT. So you couldn't use checks, drafts, similar instruments, debit cards, credit cards?

    Mr. DIGREGORY. It would have to be a cash business.

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    Mr. WATT. It would have to be a cash business at that point. OK.

    Mr. BAER. I think that the cash exception—the idea of this bill is that what you want to try to do is prevent the gambler and the casino from getting together, and the idea behind this bill is to prevent somebody from processing a transaction between those two persons. As I understand the Judiciary bill, it is sort of a similar concept. The idea there is to prevent an ISP from hooking those two people together. But in either case you assume that there is an intermediary, and you are trying to use that intermediary as a means of the two getting together.

    With cash there is no intermediary. With digital cash there may not be an intermediary, and that is why that is a difficult issue.

    Mr. WATT. As a practical matter, in terms of the result that you achieve, is there anything resultswise that the Judiciary Committee would achieve that this bill does not achieve, or that this bill would achieve that the Judiciary Committee's bill does not achieve? I am trying to figure out just in terms of the practical result of the bill.

    Mr. BAER. I think there are two issues here. One is the set of exceptions and coverage of the two bills, which I think Mr. DiGregory has covered. And then the other is, I think, just the judgment by the Congress about whether using ISPs versus using the payment system is more effective or whether you do both for that matter. And that is, I think, sort of a technological assessment about the ability of these things to move offshore.

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    Mr. WATT. That doesn't answer the question of whether one does something that the other one doesn't. That is about what process you use to accomplish the result. I am talking about in terms of result, is there a practical difference, some territory that is covered by this bill that is not covered—some result that is achieved by this bill that is not achieved by the Judiciary Committee's bill, or some result that is achieved by the Judiciary Committee's bill that is not achieved by this bill?

    Mr. DIGREGORY. I mean, I think this bill—though we have commented on the fact that we don't think it should apply to legal gambling—that this bill seems to achieve more effectively a restriction on a—a limiting of a prohibition against internet gambling, because it will keep them from accepting the payment forms that they need to operate. And that is with respect to all forms of internet gambling, without exception. No exception for horses, for dogs, for jai alai.

    Mr. WATT. And no exception for State lotteries? If a State lottery decided that it would—and I think most State lotteries prohibit this, but if a State lottery decided it would allow one to purchase a lottery ticket over the internet, or through e-commerce, this would prohibit the payment for that by check, cash, credit card, or other instrument?

    Mr. DIGREGORY. I think that is right. Before coming in here, I didn't really focus on the State lotteries, but I think that is right.

    Mr. LAFALCE. And intended.

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    Mr. WATT. I am not making a comment on whether that is good or bad. I am just trying to understand what the bill does as a practical matter.

    I will leave it for another day for me and/or others to make the practical arguments for or against that. I just want to be clear on what it does.

    OK. I yield back, Mr. Chairman. I think I have a better understanding.

    Chairman LEACH. Thank you very much, Mr. Watt.

    Mr. Green. We have excluded betting on cheese.

    Mr. GREEN. And cheeseheads as well?

    Chairman LEACH. Not cheeseheads, no.

    Mr. LAFALCE. Mr. Chairman, I was under the impression that was just parmesan and Asiago?

    Mr. WATT. Mr. Chairman, could I ask one more question of the Chairman? Under this bill if I made a little private wager over the internet with you, could I pay you by check?

    Chairman LEACH. Well, the only wager I think you would likely make you would owe me, because I am betting on Mr. Bush.
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    Mr. WATT. All right. Well, assume that Mr. Bush won, and we made that bet over the internet. I bet you $50 that Bush would not win, that Gore would win.

    Chairman LEACH. It would probably fall under the prohibitions of the bill.

    Mr. WATT. So I would have to pay you in cash?

    Chairman LEACH. I apologize. My stellar staff tells me that might not be in the definition of gambling in the bill, and that maybe you could send me a check.

    Mr. WATT. OK. If we bet cheese? Could I pay you in cheese?

    Chairman LEACH. Absolutely.

    Mr. Bentsen.

    Mr. BENTSEN. Thank you, Mr. Chairman.

    A couple of points, and I know very little about gambling, but if I am looking at the draft of the bill that was in the stack of documents we were provided, it seems to exempt State lotteries, unless this is some other bill; is that not correct?

    Chairman LEACH. No, State lotteries would be included in the prohibitions on this.
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    Mr. BENTSEN. Oh, I am sorry, this is Treasury's bill. I was looking—must be your bill or some other draft.

    Anyway, let me raise a couple of points. I generally think that the Chairman's bill is on the right track. There may need to be some modifications to it. I understand Treasury's concerns with respect to how you would actually enforce this with the credit card. How would the credit card processors understand whether or not it was a gambling facility or what State law was? But isn't this just providing Federal and State prosecutors with a tool that they subsequently could use against an internet gambling operation to say that you accepted these payments in violation of Federal law; so it is not so much catching them in the act as subsequently being able to catch them and present a case against them? Wouldn't that be part of what this is trying to provide? It may not be as crystal clear as being able to create an outright prohibition that no one will ever try to violate once they realize it is in the law, but instead providing your prosecutors with the tools they need to ultimately shut down illegal operations?

    Mr. DIGREGORY. Yeah, I think it would provide an additional tool to prosecutors by which they could shut down illegal gambling businesses, and this bill would make it illegal for any gambling business to accept those kinds of payments. So it is an additional tool.

    Mr. BENTSEN. What would be the alternative to doing that? Maybe there are some exceptions that need to be clarified, but there is no magic bullet out there that you can create that will just stop this from happening. You just have to provide the ability to prosecute.
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    Mr. DIGREGORY. There is an alternative in current Federal law that does not speak directly to the credit card issue, so I want to be very careful about describing this alternative to you. It only applies to those businesses which utilize a common carrier in order to perpetrate the gambling conduct, and that portion of 1084 requires that somebody be operating the gambling business in violation of State or Federal law and that they be using a common carrier in order to perpetrate the business. The provision allows for a State, Federal or local law enforcement officer who becomes aware of the business to go to the common carrier and ask the common carrier basically or demand that the common carrier terminate service to that gambling business. The common carrier then is protected from liability for terminating service upon notice and remedies are available to the business if the business believes that they were unfairly terminated, and we had a fairly prominent case recently where those things happened, where a carrier was notified, service was terminated with respect to a gambling business and that gambling business challenged in Federal district court the right of the law enforcement and the carrier to terminate the service, and they lost.

    Mr. BENTSEN. Would you then argue that the existing statute would then apply to internet gambling or only as it relates to the common carrier?

    Mr. DIGREGORY. Only as it relates to the common carrier and one of the particular amendments that we have recommended to 1084 would include applying that section of 1084 to cover all technologies.

    Mr. BENTSEN. And you would find that preferable than using the payment system?
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    Mr. DIGREGORY. No, not at all. I am saying that that may be another way to complement an enforcement scheme and to upgrade the current enforcement scheme with respect to gambling over wire communications.

    Mr. BENTSEN. If I might, with respect to Treasury, I think I agree with you on the issue of bringing the international financial institutions into this. I think I understand what the Chairman is trying to do, and a number of us on this panel in the past have tried to use our leverage through our executive directors at the Bank and the Fund to achieve certain other goals. I think we want to be cautious about giving them too large of a list when they go in, and this might be doing that.

    But with respect to your other concern regarding the Treasury and the Federal Reserve trying to limit access to the U.S. payment system, and your objection to that, didn't we just pass a bill through this committee a week or so ago with the Treasury support regarding money laundering that would give similar authority to the Treasury, and furthermore, where Treasury raises objections, pursuing illegal activities by individuals versus countries, again that money laundering, while focusing on the activities of the countries, ultimately would focus on the activities of individuals within those countries? So I don't know how this bill is altogether different in using that as an enforcement tool as the money laundering legislation.

    Mr. BAER. My understanding is that the money laundering legislation provides for sanctions against particular financial institutions in foreign countries, but only if those financial institutions are participating in the money laundering activity. It would not, for example, say that if there were a country that has a lot of money laundering we would block payment system access to any financial institution in that country. So in that case, there is actually some culpability on the part of the financial institution in terms of money laundering.
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    In H.R. 4419, if a country or actors within that country are fostering internet gambling, even if the financial institutions had no involvement whatsoever, all of their access to all financial institutions would be brought to the U.S. payment system, which we think is a rather Draconian remedy.

    Mr. BENTSEN. Would a more effective or more efficient way be to tie the activity of the culprit to a financial institution in that country? I mean, arguably Acme Gambling Corp., which is in some island somewhere offshore, would be operating through some financial institution if it is using the payment system and the credit card system, and so would Treasury be more comfortable if you tied it through that chain of events?

    Mr. BAER. I don't know whether we would support it, but it would clearly be preferable if you were, for example, limiting sanctions to financial institutions that are knowingly clearing payments from a U.S. citizen to an overseas casino, and that would be sort of the foreign equivalent of what the bill does domestically. Clearly there you would have a better situation in which there would be some culpability or at least some knowledge on the part of the foreign financial institution on which you are pursuing the sanction.

    Mr. BENTSEN. I also just want to say, as I recall in the money laundering bill, while the financial institution was the ultimate culprit that was being pursued, I believe, and the Chairman would know this better, I believe that Treasury would have the ability under that bill to pressure the country itself, if the financial regulators in that country were not, in Treasury's opinion, or were, in Treasury's opinion, allowing such activities to go on.

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    Mr. BAER. I am not totally familiar with them, but I understand there were some actions we would pursue with regard to the foreign country. I don't think there is anything along the lines of what is in H.R. 4419 in terms of blocking access to private sector companies in that country, again, with no culpability to a U.S. system or any U.S. operations.

    Mr. BENTSEN. Well, this seems to me that the two are not necessarily that far apart, and Treasury strongly supported one. Perhaps the thing would be to see if you can bring this provision of H.R. 4419 more closely to what was in the money laundering bill. That might make Treasury more comfortable, because if we are going to have to defend one before the WTO we might as well defend two and at least try and have similar arguments.

    Mr. BAER. We would be happy to discuss that further and talk about the distinctions between the two bills.

    Mr. BENTSEN. Thank you.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thank you very much.

    Mr. Maloney.

    Mr. Meeks.

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    Well, let me thank the two of you. We appreciate very much your testimony. Thank you very much.

    Mr. BAER. Thank you, Mr. Chairman, very much.

    Mr. DIGREGORY. Thank you, Mr. Chairman, for the invitation.

    Chairman LEACH. Our third panel is composed of Mr. Alan Kesner, who is Assistant Attorney General of the Wisconsin Department of Justice, on behalf of the National Association of Attorneys General; Mr. Richard Leone, who is President of the Century Foundation, of which I am also board member and former commissioner on the National Gambling Impact Study Commission; Mr. Daniel Nestel, who is Assistant Director of Federal Relations at the National Collegiate Athletic Association; and Mr. Alexander Ingle, who is the Chief Financial Officer of the New York Racing Association, Inc.

    Mr. Kesner, we will begin with you.

    Mr. LAFALCE. Mr. Chairman, before Mr. Kesner begins, in his testimony he makes many references to the Kyl-Goodlatte legislation. I would need some explanatory comment beforehand whether he is referring to the bill as originally introduced or the bill as finally marked up and reported out of committee.

    Mr. KESNER. On that issue the National Association of Attorneys General did work with Senator Kyl at the beginning of that process in introducing the initial bill, but we have continued to support the efforts of Senator Kyl and Representative Goodlatte all through and do continue to support the bill as it exists these days.
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    Chairman LEACH. Thank you.

    Mr. Kesner, please.


    Mr. KESNER. Thank you, Mr. Chairman, Members of the committee. As stated before, I am Alan Kesner, an Assistant Attorney General from the Wisconsin Department of Justice.

    Since 1995, actually, I have been the Chair of a committee at the National Association of Attorneys General, for the staff to deal with the problem of internet gambling. In 1996 we issued our first report on that issue, and I chaired that staff working group and continue to do so.

    In the mid-1990's we found that there were less than 25 sites on the internet that were probably accepting real-time, real money wagering and we were appalled, and we thought we should do something about that and suggested legislation to amend 1084, as discussed previously, and that is what has now become the H.R. 3125 in this House. The technology utilized at that time to browse the World Wide Web was in its infancy, and so the action for the gambling activity was not as great. But now this technology with the high bandwidth connection has made the action much more attractive to consumers.
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    Now it is possible for people sitting at their home computers to experience the real sound and the real light experiences of casino action. Not surprisingly, that industry has taken off these days. Now the latest estimates I have heard are over 850 live wagering sites on the internet for real money and this number is not going to do anything but increase if the activity is allowed to grow unchecked.

    And it is clear that what drives this industry to open so many sites providing the same service is money. For minimal investment in computer hardware and software, an individual or company can set up website operations in some friendly foreign jurisdiction and offer gambling to the world, including the United States, using the internet and just watch the money start to flow in. To many of those people it almost seems like magic and I have heard them describe it in those terms, and since it is difficult to spend actual cash over the internet, the way that it is done is using financial instruments such as the credit cards and other things that are dealt with in this bill today.

    Senator Kyl and Representative Goodlatte did propose legislation which makes the law even clearer as regards the specific prohibition and provides new enforcement tools for State and Federal governments, and from the beginning, as I stated, our organization has supported the efforts of Senator Kyl and Representative Goodlatte.

    This is actually one of the few instances where the States have come to the Federal Government asking for a specific form of legislation which would criminalize something at the Federal level. Because of the interstate and international nature of this, we feel that the protections provided by internet gambling prohibitions at the Federal level would in fact allow the States to continue their tradition of being the primary regulators of gambling that occurs within their borders, and that is why we have come to this spot.
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    The proposed Internet Gambling Prohibition Act, H.R. 3125, simply takes an effective enforcement tool that already exists for the State and Federal Governments, that being Section 1084, and applies it to activities on the internet. We have used that quite extensively in the past and we still continue to use it even to this day. That law allows the States to go to carriers and perhaps require them to pull the plug. It also operates in cooperation with the other Federal laws regulating gambling, such as the Interstate Horse Racing Act and the Indian Gaming Regulatory Act. If enacted, it would put an immediate damper on much of the internet gambling that is taking place now, and to date it has made significant strides toward enactment, but we don't know where it is going to go by the end of the session.

    But while we have worked closely in crafting that legislation, we also recognize that none of these bills provide the perfect enforcement tool to reach the goal, which is the prohibition of internet gambling or the halting of internet gambling. While that allows them to pull the plug, there are many other things that can be done.

    Based upon the success of those efforts, I am pleased to be here to testify in regards to H.R. 4419. This represents an additional tool to allow the States and the Federal Governments to slow down internet gambling. It would adopt much of the definitional language crafted during the Kyl and Goodlatte discussion and applies it to this additional enforcement mechanism, the financial instruments.

    In addition to providing another enforcement tool, this legislation provides insurance for the banking industries that unless they are specifically involved in the gambling industry itself they are not going to be liable for their actions in following the direction of the enforcers.
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    While the National Association of Attorneys General has not had the opportunity to take a formal position on this bill, it is easy to say that this is consistent with the organization's support for the implementation and recommendations that are involved in the Kyl-Goodlatte legislation and also the organization has specifically recommended enforcement and enactment of the recommendations of the National Gambling Impact Study Commission.

    As I stated earlier, money is the reason these websites are in existence, and cutting off the supply of the money for those website operators would have a strong effect on that industry. It would be entirely appropriate to liken this effort to cutting off the air supply of these operations, because without money coming in they would have no reason to continue their existence and States would regain some of their lost ability to control the gambling that occurs within their own borders.

    I thank the committee for the opportunity to provide this testimony to you, and I will be open to questions as necessary. Thank you.

    Chairman LEACH. Well, thank you very much, sir.

    Richard, you are very welcome and thank you for arranging to come before us. Your work on the commission is most appreciated.

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    Mr. LEONE. Thank you, Chairman Leach and Members of the committee. I have submitted a statement for the record. I will try to summarize that. I am going to focus on my experience as a member for two-and-one-half years of the commission Congress created to look at gambling in the United States. I should mention as an aside, because this came up earlier, it was a congressional entity and indeed therefore relied on GSA, for example, for advice. It had to hire its own lawyer, because the Justice Department deemed it wasn't part of the Executive Branch.

    So we operated in a special zone of public activity during that period, but we learned a lot. And the major thing we learned—and this affected all of us, including the members from the industry—is that after two-and-one-half years of studying gambling everywhere in the United States, we were shocked by its extent. We felt that the country had gone very far, very fast, without any real thinking. Indeed, it was clear to me that even the most ardent advocate of gambling would never have dreamed of such success over such a short period.

    It is hard to remember that just twenty-five years ago there was basically gambling in one State and a couple of lotteries here and there. It was considered an exceptional activity that we didn't want as part of our ordinary lives.

    Mr. LAFALCE. And it was against the culture of Indians in large part to gamble. We have made them a people of gamblers.

    Mr. LEONE. Well, partly out of desperation, but we now have it in every convenience store and every supermarket. When you buy a bottle of milk or a loaf of bread with your kids, placing a bet is seen as a routine, ordinary activity. The next step will be to put it in homes and that is already well underway. The effort to get horse racing into the home through telephone and on television, as you know, has led to legalization in half-a-dozen States. Major corporations, including AT&T and News Corporation, are involved in those activities, and they are building great power. But nothing will give gambling the power, in my judgment, that the internet will, and that is why I want to say at the outset that I think that H.R. 4419 represents one of the most effective steps so far. I also want to say that the Ranking Minority Member's bill, with regard to ATMs, falls into the same category and would be a helpful step in slowing down this process.
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    I recognize the difficulty of completely suppressing gambling. I don't think that is possible. We can, however, make it more difficult. We can try to deal with it as something that we are not encouraging, but rather are forcing people to think about.

    I am not going to spend a lot of time on the research and hearing phase of the commission's work. I will say something about the internet. It has assumed that kind of state of grace in Washington, somehow, as something that has to be treated differently from any other communications technology that ever existed. I don't remember people saying electricity or the telephone or outdoor plumbing or the internal combustion engine would not succeed if they were subjected to a regime of laws and taxes, but apparently that is the case with the internet. Personally, I think it is a more robust technology than that and will survive every taxation. I also think that it is entirely within the competence of Congress to develop a set of laws that relate to the internet, and I believe that will happen.

    No one, when they go on the internet, wants to be exempted from the laws of fraud. If they are bilked in a purchase, they don't want to say, ''Well, this is an area where the law doesn't apply—there is no law on the internet.'' Nobody in the securities industry, where I have had experience as a Managing Director of Dillon Read and as President of a Commodity Futures Exchange, nobody in the securities industry, which is growing apace on the internet, wants to say, ''Well, transactions on the internet are not subject to securities laws.''

    Let us take a moment on some of those laws. They include suitability, know your customer, and tight restrictions on credit. We don't extend those to the gambling industry on the internet, but they are assumed as routine in the securities industry on the internet. You would be breaking a law in anyplace in the world, and you would be brought to trial and punishment, if possible, if you disobeyed those security laws when you did a transaction on the internet.
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    I will skip to some of the obvious things that concerned the commission, and we were unanimous by the way, including the members from the industry, in our view that internet gambling should be prohibited. We were concerned about who would be gambling, as well as youth gambling obviously, the money laundering issue, the rigging of games, the fact that internet businesses can come and go at a very rapid pace, and we were most concerned, and I think this was something that opened the eyes of everybody, with the growth problem of pathological gambling, which affects millions of Americans. This is a potentially addictive damaging behavior for some people, like drinking or smoking. We don't prohibit drinking or smoking, but we have a vast web of ways of trying to enforce the public interest and educate the public about the dangers that are inherent in those activities.

    We ought to be doing the same thing in gambling. Now that we are bringing it into the home through the internet and making it more available to young people, who use the internet, as you know, more than anybody else, we have a special obligation to do something about gambling. I would just say that I think gambling on the internet is particularly seductive. The internet is an impulsive, short-term medium. Compare the average e-mail you get with a memo or a letter. We do these things quickly on the internet, and they feed some of the kinds of behaviors that are most dangerous when it comes to gambling.

    We looked at a variety of alternative mechanisms for dealing with this problem. We recognize the international difficulty of doing it. I am a little encouraged by Australia's halt to what they were doing and consideration that maybe they have gone in the wrong direction. But I don't doubt that there will be plenty of other international opportunities.

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    And I think, as the members of our group who are pro-gambling pointed out, while Americans favor gambling in a controlled, special environment, they do not like it in their own homes where they can't control who gets access to it. And so I think there is a popular will here that should be answered.

    Our commission was biased in favor of State regulation and as a former State treasurer, I have that same bias. In this case, it is not relevant. This is a Federal issue that has to be addressed at the Federal level. I think the Association of Attorneys General recognize that.

    I will be happy to talk about some of the issues that came up in the earlier questioning, and I will close by simply saying I do not believe that gambling online is unstoppable. I believe, that like many activities, while it may be impossible to wipe out, you can put sand in the wheels. We can make it more difficult. We can deal with the reality that it has the potential to change all of the rules we now have in place to deal with gambling. No one has made a decision as far as I know in this country that internet gambling is what we want.

    So I commend this committee and the Chairman for this piece of legislation. I think it is an important first step. I would be happy to talk later about why I think it is possible for the various financial institutions involved to comply with this law in a reasonable fashion. Thank you.

    Chairman LEACH. Thank you, Mr. Leone.

    Mr. Nestel.
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    Mr. NESTEL. Thank you for the opportunity to testify on behalf of the National Collegiate Athletic Association and to share with you the problems related to internet gambling among our Nation's college students.

    The NCAA has long opposed sports gambling because of its potential to jeopardize the integrity of intercollegiate athletics contests and to threaten the welfare of student athletes. Despite Federal and State laws that prohibit sports gambling in nearly every State, this activity remains a growing problem on college campuses. In recent years, NCAA institutions have suffered damaging point shaving scandals, have witnessed the spread of bookies on college campuses and have taken notice of a growing consensus of research that reveals rates of pathological and problem gambling among college students that are three times higher than the adult population. Clearly sports gambling is not a victimless crime.

    With the advent of internet gambling it should not be surprising that this activity presents a multitude of new potential dangers for young people. Not only are college students internet savvy, but they have nearly unlimited access to cyberspace. They can surf the web in their school library, in a computer lab or in the privacy of their dorm room. The emergence of internet gambling now enables students to wager behind closed doors in virtual anonymity. This new industry clearly opens a multitude of new opportunities for young people to gambling on college sports while also increasing the ease of participating in illegal game fixing schemes. These facts surely did not go unnoticed by the National Gambling Impact Study Commission that recommended a Federal ban on internet gambling one year ago.
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    Over the last few years the NCAA has been contacted by a number of students who either witnessed or participated in internet gambling on their campus. I would like to share with you one college student's story. This student attends a large university in the mid-Atlantic region. As a sophomore, the student had a group of friends who regularly placed sports bets with bookies on campus. However, it was not until the student saw an advertisement for an internet gambling website in his school newspaper that he was enticed to gamble for the first time in his life. What began as a $10 bet quickly escalated into a serious problem. The student soon was wagering $500 on single games and he wasn't alone. Most of his friends who previously bet with bookies now preferred the ease and convenience of online gambling. In just a few short months the student was $10,000 in debt.

    You might ask how does a college student get this kind of money. Today all you need to place a bet online is a credit card and college students have no trouble obtaining credit cards. Visit virtually any campus student union in the fall and you will likely see representatives of credit card companies handing out free T-shirts, gym bags and other gifts in return for completing a credit card application. Studies indicate that over 70 percent of students have credit cards and 20 percent have four or more.

    The student in our story had several credit cards, each with a $5,000 credit limit, this despite not having any job or any credit history. I am pleased to report that the student's story does have a happy ending. After amassing $10,000 in debt he gathered up the courage to tell his parents of his problems. His parents were shocked, but agreed to help him pay off his debts. Sadly this story is not unique. It is representative of the types of problems that are occurring with more frequency on college campuses.
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    Today many of the student's friends continue to gamble on sports. They will likely graduate with more credit card debt than they can handle.

    For the past three-and-one-half years the NCAA has strongly supported Federal legislation to ban internet gambling. Today hundreds of offshore internet gambling sites blatantly violate U.S. State and Federal laws prohibiting sports gambling. However, these existing laws were enacted before the birth of internet gambling. As a result, legislation is now needed to address the rapid changes in technology. Already agreements have been made with equipment manufacturers to bring internet gambling to wireless handheld devices. Imagine students placing internet bets on their cell phone. In addition, Nevada officials are already warning that if Federal legislation fails, U.S. casinos will likely enter this new marketplace. You can bet that internet gambling will really take off if casinos like Harrah's were to establish its recognized brand name in cyberspace.

    The NCAA believes that Congress should place a high priority on adopting H.R. 3125, the Internet Gambling Prohibition Act of 1999. If a bill is not enacted by the end of the 106th Congress, it is likely that the internet gambling industry will present insurmountable opposition to any further effort to check its growth in this country. The NCAA is supportive of efforts to combat sports gambling on the internet and believes that legislation prohibiting the use of certain banking instruments for internet gambling is an appropriate complement to H.R. 3125. As mentioned before, the widespread availability of credit cards provides the primary means for college students to participate in this potentially harmful activity.

    In conclusion, the NCAA strongly urges the passage of legislation that makes it clear that companies will not be permitted to use a new communications medium, the internet, to violate existing gambling laws and policy. The time for action is now.
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    Thank you.

    Chairman LEACH. Thank you very much.

    Mr. Ingle.


    Mr. INGLE. Good afternoon, Chairman Leach and Members of the committee. Thank you for conducting this very important hearing and inviting testimony on this matter.

    My name is Alec Ingle. I am the Executive Vice President and Chief Financial Officer of the New York Racing Association, which was founded in 1955 as a private nonprofit corporation, organized to conduct pari-mutuel wagering on thoroughbred racing in New York. Like many of the participants in this industry, our company and Government have had a close working relationship throughout this period. Government has provided NYRA with a license to operate and NYRA has supported Government with payments totaling $2.8 billion since 1955. I am here to testify on the impact that H.R. 4419 would have on the pari-mutuel industry.

    Horse racing was the number one spectator sport in America for decades up through the early 1970's as measured by attendance. But competition in the form of State-run lotteries and expansion of casinos outside of Nevada and a new concept of Government-owned and Government-operated off-track betting corporations began to erode racing's attendance levels. Racing's response was to make the product more appealing to the customer's convenience, time and economic needs by developing the concept of interstate simulcast wagering.
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    But implementation required permissive legislation and the industry sought congressional support. In 1978, the Interstate Horse Racing Act was passed, primarily because Congress recognized that the long term significant revenues contributed by pari-mutuel horse racing to those States was important, and when properly regulated and properly conducted, interstate off-track betting would contribute further revenues to the States, to the industry and ultimately to the economy.

    The premise was a valid one. Today, there are 43 States in which pari-mutuel wagering on horse racing is permitted. Each of these States exercises jurisdiction under the Federal guidelines provided by the Interstate Horse Racing Act and it is estimated that this industry produces annual revenues of approximately $500 million to those governments.

    The opportunity to offer simulcast wagering and, more recently, account wagering has afforded this industry a future. Last year more than 80 percent, or $12 billion, of the total wagers made were placed through a highly regulated, fully licensed, closed loop series of computerized totalisator systems that have been developed through the cooperation and coordination of 43 different States.

    Unfortunately, this future appears to be threatened with the sweeping nature of H.R. 4419, which would appear again to make it inadvertently illegal to transact simulcast wagering and account wagering over, and I quote: ''A packet switched data network,'' words contained in the bill, using checks, wire transfers and credit cards for settlement. Criminalizing this highly regulated, licensed, taxpaying, $12 billion piece of commerce would end pari-mutuel wagering as we understand it today.
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    Perhaps if the accountability of today's system were better understood, the concerns about the future would be allayed. First, all facets of today's simulcast wagering are highly controlled through licensing and State regulations. If you were to place a wager in California on a race run in New York, which is done through a series of telecommunication link-ups, that bet would incorporate a totalisator system that commingles the wager, the wagering information would be shared between the sites on dedicated phone lines that are part of a nationally-based frame relay system and the California Horse Racing Board and the New York State Racing and Wagering Board license and regulate both ends of that transaction. At the end of each racing day, the racetracks settle their accounts based upon the amount of money wagered at each wagering facility and the amount actually won by or paid out to the customers at each facility.

    There is accountability in a series of backup systems every step of the way and generally those payments occur once a week. This business-to-business settlement process has traditionally been accomplished by check or wire transfer of funds. It appears that H.R. 4419, as written, would stop the practice of simulcast wagering immediately by making it illegal to settle accepting cash, which in my company's case would not be possible when you consider the hundreds of locations that receive our signal in the United States that collectively average a million dollars in receivables per week and they are so geographically dispersed that to do it in anything but cash would be impossible.

    Another form is account wagering, which is simply establishing an account with a credit balance from which the customer can make a wager. Again this feature is an extension of our industry's response to competition. Today account wagering is widely used by Government in their OTB systems, particularly in the State that I am from, New York, as well as throughout private enterprise in the eight States that currently permit telephone wagering. Again, it is a means of offering more convenience to the customer. H.R. 4419 in its present form would put an immediate halt to this additional feature.
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    The racing industry is currently in the planning stage of an e-commerce solution that would employ automated computer networks for a national clearinghouse of payments in order to balance the accounts before the funds are transferred. This system would be subject to State oversight and would make the current processes faster and more efficient while maintaining its secure status. As written, we are concerned that H.R. 4419 would have the unintended consequence of precluding the industry from moving forward with this strategy.

    The Internet Gambling Prohibition Act draws no distinction between legitimate, State sanctioned, licensed, regulated businesses such as pari-mutuel wagering that use technology to facilitate existing business and the emerging, unregulated, offshore gaming businesses that are violating State bookmaking statutes and operating beyond the reach of U.S. law. The lack of such a distinction in the broad definitions of the internet and internet gambling in this bill has the unintended consequence of criminalizing critical business functions of legitimate State licensed, State regulated, tax paying businesses that produce hundreds of thousands of jobs and billions of dollars.

    In closing, the pari-mutuel industry respectfully proposes an amendment to the Internet Gambling Funding Prohibition Act that exempts from its prohibitions the funding of gambling activities that are otherwise legal under State and Federal law.

    Thank you.

    Chairman LEACH. Well, thank you very much, Mr. Ingle.

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    Mr. Green.

    Mr. GREEN. Thank you, Mr. Chairman.

    First, I would like to welcome Mr. Kesner here. If you were here for the earlier comments that a few people have made about cheese, you can see what a lonely business this is for people from Wisconsin.

    A couple of questions for you, if I might. We just heard the last witness say—and some of them from DOJ say previously—that the bill should be changed to narrow its focus to just illegal activities. Does your association have an opinion on that and does the Wisconsin Department of Justice have an opinion on that?

    Mr. KESNER. The association hasn't taken a specific position on that issue, although generally our position at the National Association of Attorneys General has always been that if there is legalized gambling going on, it should be well regulated and conducted, and illegal gambling should be prevented by whatever tools are necessary or appropriate. I think that a change to illegal gambling in this particular bill would probably be appropriate.

    Another important thing to remember in this context is that the use of financial instruments like credit cards may very well be prohibited under a lot of State laws. A question arose earlier about debts being enforceable. In fact, many, if not most, State laws have always prohibited the gambling debts from being enforceable, and that was even in the law in Nevada up until 1983. Those gambling industries arose quite well in spite of those debt enforcement mechanisms. Most of the State laws that have prohibited internet gambling or the enforcement of gambling debts have been amended like Wisconsin's and Minnesota's and many others to allow for the enforcement of debts for legalized gambling. So I think that that is what would be an appropriate change to this. In fact, the first case I ever lost as a prosecutor was a case of bad checks not being enforceable at a racetrack, and so I am familiar with that to the extent of that law.
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    Mr. GREEN. I don't know if you have had a chance to take a look at the proposed changes to 1084 that the U.S. Department of Justice put forward today.

    Mr. KESNER. I have seen those before.

    Mr. GREEN. Does your association, does Wisconsin DOJ have a position on the package?

    Mr. KESNER. The initial recommendation in our 1996 report was a very simple amendment to 1084 along those lines and support whatever amendments, whatever would be necessary to get something into law that would make a clear statement and clear policy tools or clear tools to allow the enforcement of internet gambling. That is one mechanism to do it. There are other mechanisms such as those that are recognized in the current versions of Senator Kyl's and Representative Goodlatte's legislation.

    Mr. GREEN. And then finally, the U.S. Department of Justice also has suggested that an amendment be added to clarify that this legislation is not intended to amend IGRA or repeal it. Does the association have a position on that?

    Mr. KESNER. In the discussions on, again, the other legislation we have extensively discussed, the effects of the Internet Gambling Prohibition Act and how it works with the current status of the Indian Gaming Regulatory Act. I think that we have always been fairly confident that the Indian Gaming Regulatory Act itself does have sufficient mechanisms to allow the prohibition of internet gambling other than in some very specific circumstances for class two gambling and so I don't know that it is necessary, absolutely necessary to make any changes to IGRA out of this bill or the other bill, although clarification is very important, and I think both bills do have some degree of—some bit of language that says it will not interfere with the otherwise lawful and operating enforcement tools under the Indian Gaming Regulatory Act.
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    Mr. GREEN. Thank you, and also thanks for your hard work. Appreciate it.

    Thank you, Mr. Chairman.

    Chairman LEACH. Thanks, Mark.

    John LaFalce.

    Mr. LAFALCE. I thank the panel. I come to this question with certain predispositions. As a State legislator I opposed creation of State lotteries. The idea that the State should be in the business of promoting the gambling instinct and exploiting the gambling instinct, sanctioning it, was something that I found extremely distasteful. That governments should be run by the wheel of fortune, rather than the rule of reason, was something that was distasteful to me, and I think that no good has come of it whatsoever, not more money for education. Money is fungible. There has been fraud in marketing.

    I should have opposed IGRA. I didn't. I regret that. We have corrupted a people, not just Indians, by telling them basically give up all their hope of economic development, focus virtually all your time and attention and energies on gambling, even though in most instances it has been hostile to your culture for centuries and centuries. We have murders taking place in Western New York because of the clash of cultures that is taking place over gambling, murders within the past several years because of this issue. And of course, it has its corrupting influence to not just Indians, but on people from around Indian locations, and it puts governments and State governments in a difficult bind, too. They must negotiate or they would not be dealing in good faith. It is a terrible law.
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    When the proliferation has taken place, too, it has produced not just gambling within virtually an hour's drive of most locations in America, so that it is no longer an economic development tool now sucking the money out of local communities. You know, when we only had gambling in Las Vegas, it was one thing, but now it is within an hour's drive of virtually everyplace in America, and of course, if it is on the internet it is in your lap everywhere you go. It is in your hand when we have the internet in our hands. It is not in our lap, it is in our hand, and we will be able to gamble wherever we are. It is overwhelming,and so we must do something.

    One of the difficulties is, you know, what in God's name will we have the political muscle to be able to do, because the gambling industry has gotten its claws into both our parties, the Democratic and the Republican parties. It is probably not too far of a stretch to say that if they don't own both our parties, they own an appreciable portion of our parties. It is that bad. It is that bad, and town halls and State halls, and so forth.

    But one of the reasons we might be able to advance an internet gambling bill right now is because the gambling industry wants it, because it is in competition with their vested interest and, because the potential for ill from internet gambling is virtually limitless. So we ought to do what we can. We ought to do more, too.

    We ought to, as you know, and Mr. Leone, you were kind enough to comment on the other bill that I introduced last year, that deals with the use of credit and debit cards at the vicinity of gambling, the gambling sites themselves, the immediate vicinity, because compulsive gambling is such an enormous, enormous problem, and there is another reason for passing that bill, too. It might not be as great as the potential problems from internet gambling, but it is probably a greater problem at least right now, but there is another reason. We ought to pass something that the gambling industry opposes just to prove that we can do it.
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    The credit card industry has no objections. They really don't. So that is one good thing for my last year's bill. But then I have another bill, a third bill.

    One of the problems with internet gambling is the use by young kids of their credit cards and the proliferation of credit cards. One of you referred—I think it was you—to a letter you received. One of the most tragic letters I received was from a mother whose child committed suicide because of the tremendous number of credit cards he had and used and the burden on him of paying off this overwhelming debt was too much for him to handle. So she wrote me.

    So one of the bills I have also introduced deals with credit cards in general, which says you don't give them to kids unless the kid is creditworthy or, alternatively, the parents approved in advance. So that is another bill we should consider, too.

    A lot of things we should be doing. The internet gambling bill was one of them. The ban on the use of credit and debit cards at the immediate sites of gambling is another, and a bill dealing with the tremendous abuses of credit cards, not just for gambling, but for any purpose, is another, and our committee is remiss if we don't focus on all of those issues. I appreciate any comments you wish to make on any of those issues.

    Mr. LEONE. May I make a comment?

    Mr. LAFALCE. I might say, too, that the credit card industry does not favor my bill dealing with credit cards, another good reason that we should pass it.
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    Mr. LEONE. I want to make a comment on the thrust of your comments and also on the last exchange, which talked about somehow distinguishing between legal and illegal gambling on the internet. I think it would be a terrible mistake to permit internet betting on so-called legal gambling, and I will tell you why.

    In the first place, every case I know of where gambling has been introduced to the United States, it has been introduced as an exception: ''We will do this here under these special controlled circumstances, and we will have lots of rules around it.'' And people said, ''Well, I will go along with that.'' And then we have said, ''Well, because of that exception to compete or because the next State has it, we need it.'' States have a lotteries, but we don't let private business compete with the lotteries. We don't let people sell even lottery tickets everywhere. There are some limits on where you can sell lottery tickets. We don't allow racetracks everywhere, although racetracks now have slot machines in some cases, because they can't compete. And, we don't allow casinos everywhere and anywhere in the country. And now, of course, with the California referendum, we are going to see a lot of casinos in California and probably elsewhere.

    And we have been on this slippery slope of exceptions. But at least in every case there has been opportunity to have a public debate to try to deal with what it is we really approve of, what people really want, what is really fair to do. Once we open up the internet, whether to legal or illegal gambling, as a place to bet, the culture of exceptions, that has to some extent been already trampled on, will be over and gambling will exist everywhere, at any time, at any place. I can imagine the ultimate conclusion of that process will be people giving up on regulating it at all, and it will be a kind of free-for-all world that, again, nobody would agree to if they thought about it at the beginning, in my judgment.
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    And so I think there are few choke points that we can go after, and one of them is credit. I will tell you what fascinates me about the resistance to this. Capitalism, which has done pretty well in this country, is built on a financial structure that has a tremendous web of restrictions on the use of credit. We have learned, often the hard way through crashes and financial crises, that we need to do that. There need to be some limits. Now, some people call this gambling a ''poor man's day trading.''

    But, even day traders—who in my judgment are engaged in a form of gambling—even day traders are subject to the restrictions of our securities law. They can only buy so much on margin. To trade certain kinds of instruments they have to demonstrate creditworthiness. They have to have a threshold of net worth. They have to have a certain amount of liquidity. But the poor man who wants to trade or ''bet'' doesn't have any of those protections that we have put in place for other people.

    Now we put those protections in place for other people not simply to protect an individual, but to protect society from the negative effects of wild speculations. Well, we have wild speculation in this country now. It is called legalized gambling. It has been led by the States and the lottery business, and it is about to go into cyberspace unless we come up with some mechanisms, like the one before the committee today, to slow it up.

    Mr. LAFALCE. There is some bill that I haven't introduced, Mr. Leone, I am just toying with it now, the possibility of prohibiting any margin of activity at an online account because of the impulse to just press the button, the lack of a check, whether it is the purchase of a commodity, a security, and so forth. I haven't thought this through at all. This is just an idea I am tossing out. It could be bad. What are your initial reactions?
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    Mr. LEONE. Well, I think that the margin requirements should be different.

    Mr. LAFALCE. Should they be different for——

    Mr. LEONE. They are generally pretty good. We have certainly come a long way from where we were in the 1920's. I think that in the commodities business, the requirement that you put up a full differential at the end of the day is a pretty stern discipline. But ultimately again, that is where ''know your customer'' comes in. No broker wants to go to his boss and say ''I have got somebody who traded so much today they are in over their heads and we are not going to be able to collect.'' That is ''know your customer.''

    Mr. LAFALCE. But if you have discount traders or no-fee traders and you have online trading and you have margin accounts, you are asking for trouble.

    Mr. LEONE. I think the bucket shops often go under, and that is why some of the online mortgage companies have gotten into great trouble.

    Mr. LAFALCE. I am not as interested in the shops as I am the consumers, to tell you the truth.

    Mr. LEONE. Well, that goes to the suitability issue and I do think that if you just introduced some suitability requirements, whether it is to margin trading that were tough, or to online gambling, you would have a very different universe right away.
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    Chairman LEACH. The gentleman from Saratoga.

    Mr. SWEENEY. Thank you, Mr. Chairman. I neglected in the first round to ask for unanimous consent to put in the record a complete statement.

    Chairman LEACH. Without objection, all Members have the right to put statements in the record, John.

    Mr. SWEENEY. Thank you. That was quite a compelling statement and presentation just then, and I am moved to point out that the culture of exceptions that you speak of, Mr. Leone, has existed for eighty-some years and I don't disagree in broad terms that you make some very valid points that should concern us all in terms of public policy. But, as Mr. Ingle pointed out, for seventy-five years the horse racing industry and sport has run rather successfully, is a taxpaying $12 billion industry, substantially responsible in some communities in this country for huge parts of its economic development and opportunities for ways of life. And what we seek in constructing a bill that limits some of the application in this proposal is to ensure that we aren't taking away or destroying or gutting that industry, which is vitally important, and I think that is a compelling public interest as well.

    Mr. Kesner, I had to step out for a second and I understand you sort of went through—as we try to find the mechanisms that will work best here—you went through the notions in your testimony that you supported the provisions of H.R. 3125 as well as these provisions in H.R. 4419, and you have pointed out that the additional enforcement mechanisms are going to be needed.
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    I believe in the questioning with Mr. Green you pointed out that, although H.R. 4419 in its broad senses, you supported, that there is some conflict that would exist between H.R. 4419 and H.R. 3125 in terms of H.R. 4419's including all internet gambling, rather than just unlawful. If you could speak to me very briefly about this issue. My concern is that it is going to cause enforcement problems for States, and for us generally, and that we need to find a way to make H.R. 4419 prohibit unlawful activities only.

    Mr. KESNER. The general concept of what has been referred to as exceptions in H.R. 3125, the overall goal of the different pieces of language that have been put in that bill and the companion bill in the Senate, have been to institutionalize currently legal activities that are State regulated and well controlled, and that has been the overall goal of all of the various pieces of language that have gone into that bill.

    Mr. SWEENEY. And there is a compelling interest in the law enforcement community to have those definitions I would think.

    Mr. KESNER. There is quite a compelling interest, because those activities, while individual people may disagree or agree about the wisdom of having racing, do this or that or fantasy sports or whatever, is done, the States have over the years made those policy choices, because they have been the ones that have been regulating gambling over the years. And now the language that has been put into that bill is simply intended to recognize and continue the currently legal activities that are already taking place.

    Mr. SWEENEY. Thank you.
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    Mr. Ingle, one of the points that I would like to have made for the record in this hearing is that, without amendment, H.R. 4419 brings about substantial change, maybe even devastating change, within the horse racing industry. So I would like to ask a couple of questions of you so that we could begin to develop some clarity and flush that out.

    You state that the internet, as defined in H.R. 4419, involves most of the emerging computer network technology that businesses use to perform banking communications functions. And if you could, I would like you to explain whether you are comfortable with the definition of internet as is presented in this bill, and if not, how would you recommend that the bill be modified to better represent the overall intent?

    Mr. INGLE. Thank you. The definition of internet in the bill itself was one that I wasn't certain of, and so I took it to our people, our technical people at our company and asked them if, in their judgment, this definition would preclude us from doing business, and the answer was unequivocally yes. Now how is it to be modified, I am not sure I am the appropriate person to ask that question of, but I can certainly establish today that, as this bill is written, with that definition of internet and the following definition of internet gambling, horse racing, as we know it, would go out of business.

    Mr. SWEENEY. How does your industry legally transfer funds from one New York location to another? And my assumption from your testimony is that this would be changed substantially.

    Mr. INGLE. Yes, it would, because the bill specifically contemplates only business-to-business settlements using cash. Within the State of New York, as well as across State lines, we settle out on essentially a week-by-week basis with remote sites or with the other racetracks that we are exchanging signals with. And those settlements generally take place either through a check or through a wire transfer of funds. Depending upon whether the funds are going from west to east or east to west, if you can imagine that; it is a function of how successful the wagerers, bettors, were in California versus in New York is what directs the funds. But the funds have to be done, because of the multiple sites and the frequency, have to be handled in either wire transfers or checks.
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    Mr. SWEENEY. I think there is a distinction to be made. Those who may or may not agree with the notion that there are legal and some legitimate, indeed, operations that we need to protect in this bill I think need to recognize that, as you state, there are a lot of regulations and rules that apply and businesses run substantially better than many others in terms of protecting the public interest.

    And I would like, if you could, finally, my last question for the record, tell us what protection, in other words, place as it relates to the account wagering system, to guard against problems such as underage or problem gambling cases.

    Mr. INGLE. If someone wants to open up an account to wager at our organization, with our organization, they fill out an application and that application is either sent in or dropped off at a customer service desk and the application is immediately sent to an outside vendor. A company called Trans Union Corporation. That application contains their answers to questions relating to their name, their address, their age, their date of birth, their Social Security number, and a number of other points.

    Trans Union then evaluates that application for its accuracy. They are able to determine the relationship between the Social Security number and the date of birth. Obviously, they are going to be in a position to tell us whether that individual is of the appropriate character and fitness as it relates to their financial responsibilities.

    And let's assume that that application comes back approved by the outside agency. That customer then can open up an account by either depositing cash at the racetrack or depositing a check. And if it is a check from a local bank, it will clear within three days. If it is an out-of-State check, it will take a longer period of time to clear. They can wire money in from another location. Those are some of the ways that they can establish the account.
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    Once the account is established, they have two ways that they can use that account. They can either use that account on-track, and obviously when the balance is drawn down, then we are no longer going to accept a wager from them. They can use that account access on the telephone. If they are not on the racetrack premises, they can call their wager in. If they do it by telephone, they are obligated in the State of New York to have a balance in their account of at least $450 before they can make a wager. That is a check-and-balance system, so to speak, to address some of the concerns that we have heard here today.

    Mr. SWEENEY. But it is of great concern to NYRA that those issues do exist, and that I was intending to try to ensure that there is not an exacerbation of those problems.

    Mr. INGLE. Exactly.

    Mr. SWEENEY. Thank you very much.

    Chairman LEACH. Mr. Watt.

    Mr. WATT. Thank you, Mr. Chairman. I have been trying to figure out what it is about this bill and about this whole subject that makes me uneasy. I think I have finally put my finger on it.

    Let me talk a little bit about substance versus process, because I think one of the problems we are having with this bill, one of the problems I am having with this bill, is that it is a process bill that is dealing with a substantive issue, and I am afraid that we have not addressed the underlying substantive issue. Yet.
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    If you believe, as Mr. LaFalce and I guess, as I understand, Mr. Leone, maybe, maybe not. But as Mr. LaFalce was certainly explicit in his belief that State lotteries, gambling on Indian reservations, internet gambling, should be prohibited, then you have dealt with the substance of this issue. I don't believe in gambling and I would have some trouble with this bill, because this bill back-doors the substantive issue. If you really believe, as Mr. LaFalce does, that we should not have gambling or internet gambling, then I think the appropriate way to deal with that would be to pass a law which says we prohibit internet gambling. End of discussion.

    This bill might accomplish the same objective by strangling the source of—but it is a process bill. We won't let you process a check. We will not let you process a credit card transaction because we want to stop some abuse. And I am not sure that we have yet dealt with, substantively, whether everybody is in accord with the substantive objective that we are trying to achieve. And I don't think we can deal with this bill until we cross that threshold.

    I think there are more direct ways to address the issue than this bill—than the process by which this bill does it. But you have got to deal with the substantive issue first. And I don't think our country, our States, our Nation, has dealt with that substantive issue: Will we prohibit gambling or will we not?

    And so I am just troubled by kind of going in the back door and dealing with cutting off the financial payment source until we have a meeting of the minds about the underlying substantive objective. If I had to guess, the three gentlemen on the left of this panel would want to apply this bill to all legal and illegal gambling. The gentleman on the right would say ''Fine, apply it to illegal gambling, but do not apply it to legal gambling.''
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    Mr. Leone, I just disagree with the process part of what you are saying, even though I respect very much and admire even the substance part of what you are saying. But I don't think you can compare this with fraud. There is a public policy statement that says that fraud is illegal and therefore you cannot do it over the internet. You cannot do it anywhere. There is a public policy that says securities fraud and securities evasion is illegal and therefore you cannot do it in person and you cannot do it over the internet.

    But we have not made that substantive judgment that gambling is illegal. We allow it at the racetrack. We allow it in lotteries. We allow it in a number of different contexts. And until we come to grips with that substantive dilemma, we cannot figure out the public policy way to address it.

    I do not agree with Mr. LaFalce that any kind of bill, just to send a message to somebody, is a good public policy way to deal with the issue. And I don't think this bill is a good public policy way to deal with the underlying issue.

    Now, maybe I am just off-base here. But I just think that we have got to deal with the underlying issue. If you all care to respond, I will shut up and let you respond.

    Mr. NESTEL. Congressman Watt, I would just like to respond just briefly. Having been involved in this issue for three-and-one-half years, I recognize that you and your colleagues have been struggling with this issue. The only message I want to deliver, and that our Association wants to deliver, is that we are at a critical juncture. This is the fourth quarter and we are in our final drive. I can completely understand the struggle that you are having with resolving the substantive issues. But please do not let that paralyze you.
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    In the remaining days of this Congress, and after three-and-one-half years of debate, I hope that we are closer to resolving some of these substantive issues. Because the message from the sports leagues is that we need a bill to prohibit internet gambling, at least when it comes to sports gambling on the internet, because it is circumventing already-existing State laws and Federal laws. And there will probably not be another chance to do it, because this industry is growing exponentially, and our fear is that if we carry this debate into another session of Congress, that there will no longer be the opportunity to get such legislation through this body.

    So, if there is any way that we can help and address some of the substantive provisions—though we do not take a position on some of the provisions that you have discussed that are troubling other Members because they are outside of our purview—we would certainly be willing to discuss with you further the importance of the bill and some of the other provisions of the bill that relate to sports gambling.

    Mr. LEONE. I think I might try to respond to you by telling you briefly about the Commission. The Commission included the chief executive officer of the MGM Grand, the president of the hotel and restaurant workers, a leading Native American——

    Mr. WATT. Did you all conclude that internet gambling should be outlawed? I expect you dealt with the substantive issue and I do not have any problem with that. But I think there are a lot of people out here who simply would like to have it both ways, and I am not sure you can have it both ways. You have got to say internet gambling is bad and it is bad whether it is applied to legal gambling or whether it is applied to illegal gambling. You have dealt with that substantive issue when you say that. But, you know, I understand the composition of the Commission.
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    Mr. LEONE. I think there were some people, they were not on the Commission, who would say there ought to be no restrictions on gambling; it ought to be everywhere and accessible to everyone under all circumstances. All of the members of the Commission, including those who had profound disagreements about gambling in general, agreed that this was not the case; that gambling should not be everywhere, that there should be some restrictions.

    Mr. WATT. But, wouldn't the Commission take the position, if that were the case that you would want to prohibit internet gambling? Wouldn't it be a lot cleaner and more direct to just pass a bill that says ''we prohibit internet gambling''? Why would we go through the back door and try to—I mean——

    Chairman LEACH. Would the gentleman yield briefly?

    Mr. WATT. The U.S. Attorney's Office would like to have as many tools as it can. It will take fifteen different ways to kill the same goose. But, until you decide the goose needs to be killed, you are just—we are treading in the wind. I will yield, and then I am really going to shut up.

    Chairman LEACH. We do have a vote, so we have a time constraint of several minutes, if you will pardon me. Let me just say the gentleman has made an observation about process and substance. Basically speaking, the Judiciary Committee has come out with a substantive bill exactly the nature you are talking about, prohibiting internet gambling. It has a number of exceptions that some people believe may have opened the door to more internet gambling.
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    But let's, for assumption, take it that substantively they came out with a clean bill against internet gambling. On process grounds, it is not clear that it is effective; that is, you can make a prohibition, but it does not have the teeth to carry it out. And it ends up that on process grounds, this committee has a link that deals with complementing the Judiciary approach to make the Judiciary approach effective.

    Now, we also may have differing judgments on the exceptions. The gentleman from the horse racing industry side points out that we have gone a little further than the Judiciary Committee and we might have to amend on substantive grounds something in our bill. We will wait and see what the will of the committee will be.

    But, you are absolutely correct on this difference between process and substance. Then as a general rule on substance, I will tell you where the NCAA has a particular perspective that is a little different than just simply the sports at the NCAA. We are very close to a circumstance that gambling will be a cost of going to college. That is absolutely ridiculous. It might become an uncontrolled cost of going to college, an uncontrolled cost that it will cause people to be thrown out of college.

    I think on that kind of substantive ground, there are a lot of us who are concerned. But the gentleman makes exactly the right distinctions and that is why we are entering into the fray.

    Now, I apologize. I would like to go to you, Mr. Kesner, if you can wrap it up in 15 seconds.
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    Mr. KESNER. I can be pretty close. I think the important statement to come out of this substance versus process discussion is the fact that States have traditionally always been the entities that make the substantive decisions on what kind of gambling is going to occur within their borders. And in this context here in this bill and in the other legislation, the States have come to the Federal Government asking for a specific tool, a specific process tool to allow us to continue our ability to enforce and decide our own State laws.

    Chairman LEACH. I will have to bring you to an end. Beyond that, the Commission, as Mr. Leone has said, has recommended two exceptions. That is, on Indian and internet gambling, the Federal Government should make these decisions, and that is one of the reasons based on certain recommendations of people.

    Let me thank all of you very much for your testimony. It has been very thoughtful and very much appreciated and we recognize there are some differences of perspective. The committee will have to work these through. Thank you very much. The hearing is adjourned.

    [Whereupon, at 12:59 p.m., the hearing was adjourned.]