SPEAKERS CONTENTS INSERTS
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FINANCIAL ASPECTS OF INTERNET GAMING:
GOOD GAMBLE OR BAD BET?
THURSDAY, JULY 12, 2001
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 2:10 p.m. in room 2128, Rayburn House Office Building, Hon. Sue W. Kelly, [chairwoman of the subcommittee], presiding.
Present: Chairwoman Kelly; Representatives Fossella, Oxley, Cantor, Tiberi, Gutierrez, Inslee, Crowley, Clay and LaFalce.
Also Present: Representatives Leach and Goodlatte.
Chairwoman KELLY. This hearing of the Subcommittee on Oversight and Investigations will come to order. Without objection, all Members' opening statements will be made part of the record.
We convene here today to listen to testimony from two panels of distinguished witnesses about a timely but controversial topic: gambling on the internet. In a few short years, the internet gambling industry has exploded. According to an internet gambling committee of the National Association of Attorneys General, there were less than 25 sites on the web in the mid-1990s.
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Today, Bear Stearns, one of the Nation's leading securities firms, estimates that there are between 1,200 and 1,400 e-gaming websites. Bear Stearns projects that as this industry continues to grow, such internet sites could generate an estimated $5 billion in revenues by 2003. That figure approximates roughly one-half of last year's casino earnings in the State of Nevada.
Internet gambling presents a complex set of legal, financial, technical and social challenges. On the legal front, it is believed that most forms of interstate internet gambling are prohibited by Federal law under the Interstate Wire Act. For years authorities have used the Wire Act to combat illegal betting by phone or other wire communications. Now with the advent of internet technology, the Wire Act and other related provisions of Federal law also stand as a legal obstacle against the establishment of internet casinos on U.S. soil.
The most serious offenders in the internet gambling arena are the virtual casinos, operating offshore beyond the reach of U.S. law. One estimate puts the number of foreign jurisdictions authorizing or tolerating internet gambling at 50. This includes not just the well-known bank secrecy jurisdictions of the Caribbean, but other countries like Australia.
The lure of licensing fees and the possibility of sharing in gambling receipts is proving to be a powerful incentive to enter and get other businesses to enter the internet gambling business. Antigua and Barbuda have reportedly licensed more than 80 internet gambling websites already. They charge about $75,000 to $85,000 as a licensing fee for a sports betting site and $100,000 for a virtual casino. A report prepared for the South African government as reported by the Bear Stearns study revealed that internet gaming revenues could yield up to $140 million in foreign exchange.
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While internet gambling represents a jackpot for such foreign jurisdictions, it's a wheel of misfortune for far too many Americans who struggle with gambling addiction and the loss of jobs, wrecked marriages and destroyed finances that often follow. With the click of a computer mouse, any American armed with a credit card can have instant anonymous access to round-the-clock gambling from the privacy of their homes. Students on college campuses with nearly unchecked access to credit cards issued by eager credit card companies have already been known to rack up large gambling debts.
As we will hear today, all of the social hazards associated with the problem of gambling at the brick-and-mortar sites are of equal if not greater concern when it comes to online gambling. Furthermore, internet gambling poses a serious problem to our youth. In the areas in which gambling is legal, strict laws have been enacted to ensure our children are prohibited from participating.
In many homes where children are far more computer literate than parents, what possibly is going to stop a child from placing a bet with their parents' credit card? Since our society has made a conscious decision to keep children from this activity, we need to think about taking steps to ensure that online casinos do not victimize our children. The issue of what we can do to protect children from these sites will be one of my first questions for our panelists today.
In addition to the social problems associated with internet gambling, U.S. authorities warn that internet gaming offers a powerful vehicle for laundering funds from illicit forces as well for evading taxes. The use of credit cards and the placement of sites offshore make locating the relevant parties, gathering information for the necessary evidence, and prosecuting those parties difficult, if not impossible.
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In closing, let me say that the purpose of the hearing today is one of oversight. It will help us assess what has happened in the internet gambling arena since Congress examined the issue last year. It's my intent, however, not to stop at oversight, but to work with the legislative subcommittees under this subcommittee to support appropriate legislative action in the months ahead.
Internet gambling can no longer simply be left to random events and foreign jurisdictions. It's time for Congress to address these issues and identify an appropriate public policy response.
I would like to let the Members of the subcommittee and the witnesses before us know today that it is my intention to enforce the 5-minute rule, and I would appreciate your cooperation in this. At this time, I am going to recognize Mr. LaFalce.
Mr. LAFALCE. I thank the Chairlady, and I commend her for holding what I consider to be an extremely important hearing.
I hope that this hearing marks what will be only the first step in this Congress to address the very serious social problems sometimes associated with the expansion of gambling throughout our country and the recurring reliance on gambling in some areas as an economic development tool. I have been concerned for many years with the expansion of high-stakes gambling and was the first House sponsor of legislation that called for the creation of a national commission to study the impact of the spread of gambling on individuals, families and communities.
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I was joined at that time by Congressman Frank Wolf, and especially with his leadership in the following Congress, the 95th Congress, we were able to obtain passage of that legislation.
Gambling has become too widespread a phenomenon in American society to eliminate it. We must instead focus our efforts on ways to mitigate its potential adverse consequences on America's families and communities. Gambling can provide a tool for concentrating public and private investment and consumer spending to promote economic growth, so long as it is restricted to a very limited number of jurisdictions. But when it expands virtually everywhere, this ability to concentrate economic resources is lost, eliminated. And this is one of the particular problems associated 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 the affected communities realizing any economic benefit or any additional tax revenues to help offset these added social costs. In many instances, the economic benefits of internet gambling go solely to website operators halfway around the world.
I recognize there is a wide variation of opinion within the Financial Services Committee and the Congress on the merits of internet gambling in particular and gambling in general. But I believe and very strongly that internet gambling represents a threat to many of the most vulnerable segments of our population, especially young people who know the medium so well and who are so active in its use.
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A dormitory room with one student, one laptop and one or a dozen credit cards can become a virtual casino. And that is true of any room in any building in America or in any country in the world or any place in the world. All you have to do is take your palm wireless out of your pocket and you can engage in gambling anywhere in the world. And how does society benefit from that?
The national commission recommended that Congress act to prohibit wire transfers and other payments to known internet gambling sites. I'm glad that our Subcommittee is examining this issue, and I hope it will lead to legislation putting the commission's recommendation on this subject into statute.
But we shouldn't limit our inquiry to this one area. The commission 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. The commission found that the migration of ATMs and credit card machines inside the casino has been a significant factor in the dramatic increase in problem and pathological gambling. I believe our subcommittee should examine this issue and enact legislation to carry out this other recommendation of the national commission.
In the last Congress I introduced such a bill, H.R. 2811. In the near future, perhaps next week, I will reintroduce that legislation and also legislation similar to the bill that I cosponsored with Congressman Leach in the last Congress to prohibit the use of credit cards and other payment systems to place bets over the internet, but without provisions adopted in the Banking Committee last year that I believe substantially weakened its effectiveness.
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I look forward to hearing the testimony of all the witnesses. But I am particularly pleased to welcome Dr. Valerie Lorenz, the Executive Director of the Compulsive Gambling Center, who is an expert in the treatment of compulsive gambling. Dr. Lorenz has first-hand knowledge of the harm created by internet gambling in the lives of individuals.
Madam Chairwoman, again I thank you.
Chairwoman KELLY. Thank you very much, Mr. LaFalce.
We turn next to Mr. Cantor.
Mr. CANTOR. Thank you, Madam Chairwoman. First of all, I would like to compliment you and the staff and certainly Congressman Goodlatte, who has worked long and hard on the issues surrounding the internet and gambling. But I would also like to take this opportunity, Madam Chairwoman, to thank the staff for the quality of the panelists here before us today. One in particular, who is a personal friend of mine, Ms. Penny Kyle, who is here on behalf of the National Association of State and Provincial Lotteries. She is the Executive Director of the Virginia Lottery and a personal friend. She has been in that position at the Lottery for about 7 years in Virginia. It was quite a coup when then-Governor, now Senator George Allen, asked Penny to serve our commonwealth, because she has quite a reputation both in business and government circles. So we felt very fortunate and very lucky to have her in State government making her contribution to the greater good of the commonwealth.
Penny, welcome, and thanks for being here. And I yield back, Madam Chairwoman.
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Chairwoman KELLY. Thank you very much, Mr. Crowley. We are going to hear from Ms. Kyle in the second panel and we are glad you are here, Ms. Kyle. Next we turn to my colleague, Mr. Crowley.
Mr. CROWLEY. Thank you, Chairwoman Kelly, for having this hearing today. I want to thank the panels before us. As the former Chairman of the Racing and Wagering Committee—that's a great name for a committee, isn't it?—in the State legislature in New York, I come to the Congress with some background on some of the issues that we are going to be talking about today.
Let me just state that I am a supporter of legalized gambling and would oppose any legislation that would hinder the operations of gaming, whether they be by Native Americans such as the Oneidas in New York or by government entities or by limiting gambling for OTB in New York State or racing in New York State and elsewhere throughout our Nation where wagering is currently legal. If conducted fairly with adequate public safeguards and by legal adults, I think gaming should be just that—a game—and for leisure.
That is not to downplay the suffering, as has been mentioned, of those who suffer from excessive gambling and addictions caused by gambling, but I don't think we should rush to judgment on a legal and regulated industry because of some tragic examples. In my home State of New York, we have a very well regulated and maintained gaming system which provides hundreds of millions of dollars annually back to the people of the State of New York. And I am very interested in hearing the testimony today.
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But I would hope that the subcommittee draw a distinction between and a difference between internet gaming, which I do have concerns for, and the policing of that potential industry, and I have fears, as was mentioned by Mr. LaFalce, for our young and most vulnerable in terms of this new form of gaming. But to draw a distinction between internet gambling and the simulcasting of horseracing throughout the country, an industry in New York State which employs anywhere between 20 directly and 60 thousand people indirectly in the State of New York, the horseracing industry does. And I would hate to see anything done that would diminish that industry in the State of New York. And I would yield back the balance of my time.
Chairwoman KELLY. Thank you very much, Mr. Crowley.
Next we turn to a gentleman who is not a Member of the Subcommittee, but certainly a strong Member of our committee and has a very strong interest in this issue, Mr. Leach.
Mr. LEACH. Well, thank you, Sue. And I want to express my personal appreciation for your leadership on the issue. I have a long statement I would like to ask simply to place in the record.
Chairwoman KELLY. So moved.
Mr. LEACH. And very quickly, just a couple of observations.
Mr. LAFALCE. Jim, could you speak up a bit more? I have difficulty hearing you.
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Mr. LEACH. It's my mother's fault, John.
[Laughter.]
Mr. LEACH. Anyway, by way of observations, the Chair and Mr. LaFalce have outlined some of the social implications of this. I would only stress that these implications go far beyond simply the participants in what could be an exponential increase in gambling, because intermediaries have to pick up the cost for losses. Those intermediaries are financial institutions and credit card companies, and they make higher fees for everybody else.
I was a little distressed to read in the testimony we are about to receive that one of America's principal credit card companies thinks this will be too onersome to implement a law that addresses a settlement mechanism. And all I can say is, it would be a lot more difficult to take care of the losses that are likely to arise for these credit card companies. In fact, in my time in the Congress, I would go so far as to say that the conclusion of that testimony understands the vested interest of the industry that it represents less than any testimony I have ever seen.
Having said that, it strikes me that this subcommittee has a special jurisdiction, because we have the most sensible approach to enforcement. And the settlement mechanism is the only effective enforcement mechanism I know of for the internet issue. Congressman Goodlatte has helped lead this Congress in looking at new approaches to this issue, and I want to tip my hat to his efforts. But this subcommittee's jurisdiction is very profound on the settlement mechanism issues. And if anyone knows of a better, more effective enforcement mechanism is, I am open to hear about it.
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But I would only stress that the approaches that this subcommittee can deal with, and I have reintroduced legislation we introduced last year that passed this committee virtually unanimously, and I might say to the gentleman from New York that it made a very clear distinction between existing kinds of legal gambling enterprises and other kinds of enterprises that aren't legal. But we have an absolute utter obligation to look at this issue on a timely basis, and that means before it gets out of hand. And if one looks at the growth of this industry, it is getting out of hand, and we should act as quickly as possible.
I thank the Chair, and I'm sorry I took more time than I intended.
Chairwoman KELLY. Thank you very much, Mr. Leach.
We turn now to Mr. Gutierrez.
Mr. GUTIERREZ. Thank you very much. I apologize for the delay. Good afternoon, Chairwoman Kelly and thank you for holding what as I understand is a very important hearing. Today we are joined by a great number of experts who will share with us their knowledge and expertise in the area of internet gambling. I hope that with the information and expertise gathered here today, we would be able to better address the issues concerning the rise of the internet gambling industry.
Approximately one million Americans gamble online every day, and about 4.5 million Americans, about 5 percent of those with access to the internet, have gambled online at least once. Given the substantial number of people directly and indirectly affected by the future of internet gambling, it is our job to guarantee that there are solid laws, secure technology, and high-quality products in place.
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Although most States allow some form of gambling activities, many States seek to prohibit online gambling because of the various problems associated with these. These include greater potential for fraud, increase in gambling addictions, protections of State tax revenues and children's easy access to gambling sites. I am particularly concerned about the ease with which children can access cyber casinos. In addition, we need to invest in prevention and treatment programs that will help gambling addicts and their families from devastating impacts of this problem.
As you can see from my opening statement, I am ready to listen to all parties involved, and I look forward to hearing the testimonies so that I can make further decisions. Thank you so much.
Chairwoman KELLY. Thank you very much, Mr. Gutierrez.
We turn now to the Chairman of the committee, Mr. Oxley.
Mr. OXLEY. Thank you, Madam Chairwoman. I want to commend you for calling today's hearing on a topic of utmost concern, the financial aspects of internet gambling. While it may seem a good gamble for those who engage in it, experience shows that it is often a bad bet in the end.
Today's hearing is intended to get the lay of the land. We will learn from an economist's viewpoint how internet gambling has grown in recent years. We'll learn from the State law enforcement perspective what power the States have to stop illicit gambling on the web and what means are being taken by criminals to evade those efforts.
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We'll hear from those in the trenches, the psychologists and counselors who on a daily basis see the devastation caused by an unregulated industry operating in an unforgiving medium.
We'll hear from the big players in this big game of chance—the large casinos, the State lotteries and the racing industry. And we'll hear from the software providers, the enablers, without whose expertise and acumen internet gambling could not exist. And we'll hear from perhaps the most vulnerable population, college athletics, whose contests become fair game for gambling on the internet, whose athletes are potentially compromised by the allure of cash payments, payouts for throwing games or shaving points, and whose students, your kids and my kinds, are potentially victims of a too easy, snake-in-the-garden enticement of big winnings that often results in financial losses that will trail them and their families for years.
As a matter of fact, just a couple of weeks ago we had a visit from a number of prominent NCAA coaches discussing the problems that have developed over the gambling issue and point shaving and the concerns that they raise. We had everybody from Bo Schembechler, the former football coach at Michigan and my alma mater, Miami University, as well as John Calipari, Lou Holtz, and many, many others.
Finally, we'll hear from the credit card companies, whose products are in most cases the instruments by which internet gambling takes place. I am pleased to see that my full committee colleague and former Chairman of the Banking and Financial Services Committee, Mr. Leach, is in attendance, and I look forward to his questions and comments on this particular issue, since he has had enormous leadership and foresight in this area over a number of years.
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The internet to many conjures up the images of the Wild West; the frontier; new, unconquered horizons; seemingly unlimited potential. To those holding such a view, gambling is just part of the tableau. But instead of Gus and Tex sitting at the back table at the Dead Eye Saloon, engaged in a high-stakes game of seven-card stud, we've got little Jimmy sitting at the family computer maxing out mom's credit card. trying to beat the spread on the Ohio State-Iowa game as posted by a virtual casino based in the Netherlands Antilles. Tex and Gus's card game often ended in a little ''disagreement,'' best settled at ten paces in the middle of Main Street. Little Jimmy's losing football bet may result in financial hardship for his family, possible criminal prosecution, and maybe a month without Dawson's Creek for little Jimmy.
If little Jimmy is truly a child, allowed free ability to gamble by some fly by-night casino in the Caribbean or elsewhere overseas, then we have much cause to be concerned. If he is instead Big Jim, with his pocket full of sports lines, wallet full of MasterCards and Visa cards and access to the casinos of the world through the internet without having to step away from the comfort of his own living room, we have the potential for disaster. Families can be ruined, savings can be lost. In a very real sense, we've gone from ''High Noon'' to ''Wasting Away in Margaritaville.''
I look forward to the testimony this afternoon and to continuing dialogue as we tread this thorny but necessary path toward a solution to a troubling and growing threat to our Nation's financial markets and its families.
Madam Chairwoman, again I commend you and look forward to the testimony as this subcommittee completes its first step toward reining in this wild bronco called internet gambling.
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Chairwoman KELLY. Thank you very much, Mr. Chairman.
Mr. Tiberi, have you got a statement?
[No response.]
Chairwoman KELLY. Mr. Inslee, do you have an opening statement?
[No response.]
Chairwoman KELLY. All right. Then I'd like to ask unanimous consent. We have with us a Member who is not a Member of our committee but who has a very strong interest in this issue, Congressman Goodlatte. And Mr. Goodlatte, have you any opening statement?
Mr. GOODLATTE. Madam Chairwoman, I just want to thank you for holding this hearing and second to thank you and the other Members of the subcommittee for your indulgence in allowing me to participate today. This is an issue that I have a great deal of interest in, introduced legislation in the last Congress which received the vote of 61 percent of the Members of the House. A companion bill introduced by Senator Kyl in the Senate has passed the Senate on two occasions. And so this year we want to work very closely with your subcommittee and your concerns regarding the financial instruments used here to formulate legislation which will be passed and address this problem.
It's a serious problem of literally billions of dollars being sucked out of our economy by hundreds of illegal, unregulated, untaxed, offshore entities that are causing problems in communities just as if the community, had a casino in their downtown, all of the problems that come, family problems, criminal problems, addiction problems, bankruptcy, all of those things occur with this just as if you had the problem right in your community.
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So we as a country have an obligation to address this problem, and I thank you for your leadership in holding this hearing today to get us started on the information we need.
Chairwoman KELLY. Thank you very much, Mr. Goodlatte.
Mr. Fossella, did you have an opening statement?
Mr. FOSSELLA. I'm still trying to digest what Chairman Oxley said.
[Laughter.]
Mr. FOSSELLA. So I don't have a statement.
Chairwoman KELLY. Thank you very much. If there are no more opening statements, let's begin with our first panel. We'll begin first with Mr. John Peter Suarez, the Director of the Division of Gaming Enforcement for the New Jersey Department of Law and Public Safety, who has recently brought suit against three offshore casinos, focusing on their billboard advertising and targeting of minors.
Next we have Mr. Sebastian Sinclair, Vice President of Christiansen Capital Advisors. He is an economist who will discuss the money involved in internet gambling and the increasing number of internet gambling sites and give his view of where things are going in the future.
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Then we will hear from Mr. Keith Whyte, the Executive Director of the National Council on Problem Gambling Incorporated, who represents counselors who deal with problem gambling, including internet gambling.
Next we will listen to Dr. Valerie Lorenz, the Executive Director of the Compulsive Gambling Center, who is a psychologist who treats compulsive gamblers, including internet gamblers.
Finally, we have Mr. Frank Fahrenkopf, President and CEO of the American Gaming Association, which represents casinos, who will share their perspectives on these issues.
I want to thank all of you for taking time out of your busy schedules to join us here today to share your thoughts on this important issue. Without objection, your written statements will be made a part of the record. You will each be recognized in turn for a 5-minute summary of your testimony. Thank you very much. And we'll begin with you, Mr. Suarez.
STATEMENT OF JOHN PETER SUAREZ, DIRECTOR, DIVISION OF GAMING ENFORCEMENT, NEW JERSEY DEPARTMENT OF LAW AND PUBLIC SAFETY
Mr. SUAREZ. Thank you, Madam Chairwoman and Members of the subcommittee. I appreciate very much the opportunity to speak to you today about internet gaming.
Before addressing directly internet gaming, I would like to give you a brief synopsis of gaming as it exists in New Jersey today. Gaming was first legalized in New Jersey in 1977, and we opened our first casino shortly thereafter in 1978. Since that time, 12 casinos have opened in New Jersey, and those 12 casinos employ roughly 50,000 people in our State. Those 12 casinos generated $4.4 billion in revenue last year and received over 34 million visitors, making it by some accounts one of the most popular destination resorts in the United States. The internet could change all of that.
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By our estimates, and Madam Chairwoman, you alluded to this, there are well over 1,000 internet sites located predominately in offshore locales such as Antigua, the Netherlands Antilles or other Caribbean countries. The typical internet casino, though quote/unquote ''licensed'' by the host country faces none of the regulatory scrutiny that is typically associated with land-based casinos. Indeed, it is our view that many of the operators of offshore casinos seek out jurisdictions with the lowest common denominator of regulatory scrutiny, moving their operations from places where they are not subject to strict Government oversight.
The risks of unregulated internet gaming, or rather poorly regulated internet gaming, should be clear to every Member of this subcommittee: No meaningful limitation on participation by underage gamblers or problem gamblers. No assurance as to the integrity of the operators or the game or to the fact that payouts will actually be received. The concerns regarding money-laundering. Protection against security breaches, hacking, and information oridentity theft, to name some of the more salient concerns.
From an economic standpoint internet gaming as it exists today fails to provide any positive benefit to the United States in the form of income taxes or taxes or jobs. In addition to those concerns, from New Jersey's perspective, the fundamental problem with internet gaming is that it is a violation of New Jersey's Constitution. Our Constitution requires any form of gambling to be specifically approved by the people by a vote in a referendum. The question of internet gambling has never been put to the people of New Jersey and therefore represents a violation of our Constitution and our civil and criminal laws.
Faced with this industry, New Jersey has instituted legal proceedings against three internet operators to stop them from soliciting or accepting wagers in New Jersey. In June of this year, the Division of Gaming Enforcement, the agency of which I am the director, took the unusual step of filing civil complaints against three internet casinos that were operating and advertising in New Jersey. These three were identified because of their billboard advertising and because of the ease with which we could wager.
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Two of the sites offered sports book and casino-style games. The third offered just casino-style games. All three accepted wagers from 15-, 16- and 17-year-old children without any screening mechanism whatsoever. In our action, we have asked the courts to enjoin these casinos from accepting wagers from New Jersey residents and to recover funds lost by our citizens.
Although we fully believe that our cases can and will be won, they will present some difficult issues for the courts to address, and those issues will take time. One of those issues that I would like to touch on briefly is the question of jurisdiction. As many of you Members know, many of the offshore operators contend that since they operate in an offshore locale where they are legally entitled to operate and the wagers are processed in that offshore locale, they do not have any concerns nor does the States or the Federal Government have any jurisdiction over them. This argument is quite simply nonsense.
And as far back as 1953, New Jersey Supreme Court recognized that a wager takes place both where the call is made and where the call is received. That theory of jurisdiction has been applied in just about every case that's been asked to address internet gaming in the United States. That is the same as the policy of the Department of Justice and has always been that case.
Once we defeat claims about jurisdiction, however, we must deal with the difficulty of processing or proceeding in a civil context. In the time that it takes us to proceed, more casinos will open up, more wagers will be accepted, more money will be lost.
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Before I mention the legislation and sum up, I would like to say that in testifying today, I do not intend to advocate for or against a referendum in New Jersey. I do intend, however, to be advocating that some action must be taken. There are obviously two choices facing the States and the Federal Government: They are prohibition or regulation. Obviously, regulation can and could be done along the models at land-based casinos. Prohibition along the lines of the Leach-Kyl-Goodlatte provisions that simply declare credit card debts or other transactions that are a result of illegal internet wagering can and will be enforced if that legislation is passed.
I submit to you that something can be done. The time to do something is now. Because this is, from New Jersey's perspective, a far too important issue to be decided by inaction. And I do not believe that the mistaken belief in the impossibility of enforcing a prohibition should be the basis from which a rational decision about internet gaming should be made.
Thank you for the opportunity for speaking to you today, and I am available for questions if you have any.
Chairwoman KELLY. Thank you, Mr. Suarez.
Mr. Sinclair.
STATEMENT OF SEBASTIAN SINCLAIR, VICE PRESIDENT, CHRISTIANSEN CAPITAL ADVISERS
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Mr. SINCLAIR. Good afternoon. To answer your first question, which was whether internet gambling is a good gamble or a bad bet, I'm sorry. I don't have the answer to that.
This is an intractable problem that has imperfect solutions. As Mr. Suarez mentioned, we have the option of prohibition versus regulation. There is no magic bullet here. But let's look at the state of the industry as it exists now. We estimate that $2.2 billion was spent globally on internet gambling last year.
The interesting aspect of that is that the majority of that came from U.S. citizens. And in keeping with the theme that we're talking about here today, another majority of that, about $1 billion, was probably bet on sports, which based upon the Cohen case, which probably appears several times in the written testimony, is illegal in this country. Of that $1 billion that was bet on sports, about $700 to $800 million probably came from U.S. residents. This is what would be a prohibited activity in this country, based upon the Cohen case.
Now let's look at what the Cohen case tells us. Mr. Cohen was convicted of violating the Wire Wager Act. It is currently on appeal. Most legal scholars who are familiar with the Wire Wager Act don't expect him to win that appeal. So while the Cohen case was a legal victory, it was a practical failure. And it was a practical failure for two reasons. One, Mr. Cohen voluntarily came to the United States to stand trial. And two, his company, World Sports Exchange, is still operating and is still taking bets from U.S. citizens.
Now as we move into the option of prohibition versus regulation, in my perspective as an analyst and looking back at history, we have been relatively unsuccessful in the past at legislating away demand. In previous eras we used to be able to do it by restricting supply. As some of the Members mentioned today, gambling has expanded in this country to the point where today it is now a $61.4 billion business.
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Stopping supply is difficult in the Digital Age. It is difficult, as some of the legislation has proposed, to block access to gambling sites. As we'll get into a little further on, choking financial transactions, which seems to be the legislative frontrunner and probably the reason why we're here today, has enforcement problems as well.
The first thing that we need to talk about is that you can argue whether gambling is right or wrong, moral or immoral, but the fact is it's pervasive. I don't know the local area very well, but I imagine that I don't have to walk very far to buy a DC. lottery ticket. Eighty miles from here to the East, I can play the slot machines at Dover Downs or at Harrington Raceway. And Washington, DC. is not unique. In any other location in this country, I could probably make similar statements.
So the question is, how do we un-ring that bell? Through sucessive expansion we have created demand for a product that is today available in an unregulated environment.
So then we move on to the enforcement problem. Speaking specifically to the credit card issues that we're talking about here today, I see two problems with that in terms of enforcement. One is getting foreign countries and banks to devote time and resources to what is a legal activity in their jurisdictions. The United Kingdom and Australia actively seek bets from U.S. citizens. In fact, legislation was just passed in Australia that allows them to do so.
The second problem, and I see that as more of a real problem, because maybe the Government will be successful at getting foreign-based banks to stop processing those transactions. This other problem is the PayPal problem. The third-party transaction processors. PayPal is a company that uses digital cash. You can set up an account with wire transfer, check, or credit card, and you can use that digital cash at any site. I call it the PayPal problem, because that's probably one third-party processor that you're familiar with. But in the very near future, if this legislation, as I see it, were to pass, it would create a whole new illegal industry, and that's third-party internet gambling processors located in offshore jurisdictions.
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So let's explore the other option, regulation in a legal context. The medium of the internet lends itself to regulation. Let me give you a quick example. The Western European model of legalizing internet gambling is to restrict it to the Nation in which it is located. And there are very good ways to do that. One way that is being proposed and actually being utilized is a proprietary dialer that will only dial seven digits from where you are. It works. It's 100 percent effective. The technology has been approved by the Nevada Gaming Control Board, and it effectively restricts access to gambling sites from one location. Conversely, it's very difficult to restrict gambling sites from coming in. And I'm out of time.
Chairwoman KELLY. You can sum up if you want.
Mr. SINCLAIR. OK. Real quickly.
Chairwoman KELLY. OK. That's enough.
[Laughter.]
Chairwoman KELLY. Just kidding.
Mr. SINCLAIR. In conclusion, I've been following this industry for a long time, and I can understand the fears associated with gambling and the spread of gambling. But I am always reminded of the old adage to keep your friends close and your enemies even closer. Gambling is a product like alcohol that is dangerous to some. There are very real dangers associated with gambling. But it's my belief that sweeping this activity under the rug and handing it to criminals will do more to exacerbate problem gambling than to help it.
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Chairwoman KELLY. Thank you, Mr. Sinclair.
Mr. Whyte.
STATEMENT OF KEITH S. WHYTE, EXECUTIVE DIRECTOR, NATIONAL COUNCIL ON PROBLEM GAMBLING
Mr. WHYTE. I would like to thank the Chair and the Members of the subcommittee for the opportunity to testify on behalf of the National Council on Problem Gambling, the Nation's oldest and largest organization dedicated to addressing problem gambling issues.
Since 1972, we have worked with Federal, tribal, State and local governments, the gaming industry and other non-profits to address problem gambling. The mission of the National Council is to increase public awareness of problem gambling, to ensure the availability of treatment for problem gamblers and their families, and to encourage programs for research and prevention.
We have consistently maintained a position of neutrality on gambling, arguing neither for nor against it. We currently have 33 State affiliates throughout the Nation, and numerous corporate and individual members. We are the leading United States experts on problem gambling treatment, prevention, research, and education.
Pathological gambling is a mental health disorder. I've attached the standard criteria from the American Psychiatric Association to my testimony. Prevalence-wise, about 1 percent of the U.S. adult population would meet criteria for pathological gambling in a given year. Another 2 to 3 percent would meet criteria for problem gambling, which is the less severe but certainly folks that are experiencing problems relating to their wagering.
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Now 2 to 3 percent doesn't sound like a lot. In real terms, that translates to 11 million Americans that are facing problems with their gambling each year.
As several Members have noted, not surprisingly, problem gamblers suffer from a high rate of financial debt, suicide, mental health problems and other physical disorders, and bankruptcy are all associated with problem gambling.
Gambling on the internet is a relatively new issue, and I would like to present a little bit of evidence that we have. Unfortunately, the research in this area has lagged behind the public policy debate. A recent study in Oregon shows that of 14 forms of gambling, legal and illegal gambling, only one has grown between 1997 and 2000. That is internet gambling. If you average it out, the growth rate in percentage terms, it's 91 percent a year.
And although internet gambling has been growing rapidly, as many of you have noted, legalized gambling in the U.S. participation-wise has stayed relatively the same. Anywhere from 75 percent to 80 percent of U.S. adults will place a bet at at least one point in their lifetime. And I think that's a significant number for the subcommittee to recall in that legalized gambling and gambling participation is in essence ubiquitous throughout the United States.
As Chairwoman Kelly and Representative LaFalce have noted, a particular area of concern is the intersection of three trends: Access of adolescents to the internet, access of adolescents to credit, and the propensity of adolescents to bet on existing areas. Surveys show that participation by adolescents is sky high. Over 40 percent have played card games for money in the past year. Thirty-two percent have bet on games of skill such as pool or golf. Thirty-one percent have bet on sports, and 30 percent have bet on the lottery. It is significant to note that not only are all four of these activities illegal for adolescents in the United States, but these surveys were based on telephone surveys from home. So we can anticipate that the adolescent at home answering these questions is possibly going to underestimate their involvement.
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Furthermore, youth have access to credit. A Consumer Federation of America survey found that over 70 percent of undergraduates have at least one credit card. We certainly know that this same population has enormous access to the internet. We are increasingly concerned that this cluster of trends is going to result in a lot more internet gambling among adolescents.
I took a sample of 18 calls from our nationwide help line that we have received over the past 4 months. Significantly, four of those 18 callers to our help line were students between the ages of 18 and 25. I have reproduced the statistics on my chart at the end of my testimony, which I would encourage you to examine. It is important to note that this survey is neither representative of callers to our help line nor of problem gamblers in the United States, nor of gamblers anywhere else. It's an extraordinarily small sample, only about 2 percent of our intakes.
But what we'd like to make sure that this subcommittee has a perspective of is the enormous damage that is already occurring from internet gambling and from legalized gambling in the United States. The primary concern of the National Council on Problem Gambling is not so much the increased accessibility of the internet, but the fact that even for people that have problems with legal gambling in the United States, there is simply nowhere for them to go. All 18 of those callers to our help line have an 80 percent of being denied insurance coverage for their gambling addiction. There are only 15 States that provide any sort of services for people with gambling problems.
We would encourage the subcommittee, as you are wrestling with the difficult issue of internet gambling, to realize that problem gambling extends beyond the internet to those who already are gambling on legal activities in the United States. But we thank you very much for the opportunity to testify, and we will be happy to answer any questions.
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Chairwoman KELLY. Thank you very much, Mr. Whyte.
Dr. Lorenz.
STATEMENT OF VALERIE LORENZ, Ph.D., EXECUTIVE DIRECTOR, COMPULSIVE GAMBLING CENTER, INC., BALTIMORE, MD
Ms. LORENZ. Thank you for permitting me to testify as well.
Chairwoman KELLY. Excuse me, Doctor, would you please pull that microphone closer and raise it so that we can hear what you're saying? Thank you.
Ms. LORENZ. Thank you. First of all, I would like to thank this subcommittee for permitting me to testify as well. Briefly, I have been in the field of compulsive gambling for nearly 30 years, and in that time, I have seen gambling increase from the State of Nevada, which had pervasive gambling, to now all forms of gambling in virtually every State except three, all the way up to the internet. We have indeed become a Nation of gamblers.
I was asked to respond to four specific questions: ''What impact has the internet had on the problem of underage and pathological gambling?'' Well, that's an interesting question, but it is hard to quantify, because there is no hard data. We have not had the research monies to really respond to that question in a scientific way. I can tell you, though, that as legalized gambling has increased, so has the number of compulsive gamblers.
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To add to the figures that we see in various studies which state anywhere from 1.5 to 5 percent of the people of the American adults are compulsive gamblers, depending on the amount of gambling in a particular State, we also have those people who are considered problem gamblers, those who do not yet meet the criteria of gambling addiction but who are on the verge of that addiction if they continue to gamble.
The largest increase that we see among compulsive gamblers are the teenagers, the young people, those in their early twenties, and our senior citizens. The question is, what is the impact of compulsive gambling? One needs to remember that gambling is an addiction, and just like alcoholism, gambling addiction will continue into future generations. This is not only the gambling itself, but also the impact of compulsive gambling. It will continue into future generations. That is the nature of addictions.
Compulsive gambling leads to financial ruin, severe indebtedness, and to bankruptcies, to poor work productivity and terminations, to broken homes, broken families and lost homes, to health problems and other addictions, not just among the gamblers but also among the gamblers' families.
It has a frightening suicide rate. And crimes which in the past were non-violent financial crimes, have now expanded to crimes of violence, including homicide.
We have a larger population of senior citizens than we have ever had before in our country. Usually on a monthly basis, these seniors will take a bus to the casinos or buy daily lottery tickets. Now we are proposing that they stay at home and gamble over their TV and computers. In short, they can lose everything they have ever worked for, lose it in their own living rooms with no chance of financial recovery, or in many instances, survival.
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For the first time in our country, we have an entire generation growing up with Government's message that gambling is OK. This young group of people has been schooled on computers. Many have their own laptops. They can log onto AOL, pull up Pogo, where half the 40 choices of games are gambling games. It is this young population that now is being hooked. It is so easy to forget the time spent on a computer and not to realize how much money has been put on a credit card. All these tools are products of gambling.
According to the Internet Gaming Council, a trade association, it has tracked 1,400 websites that invite people to gamble. Internet gambling would increase this number dramatically if it were to be legalized.
Second question: ''What technical obstacles stand in the way of these issues? Regulation?'' I would say there is no way to regulate gambling on the internet on one's computer or television. Quote: ''It's not just feasible for law enforcement to monitor what people are doing in their living rooms with their computers,'' says John Glogau, Special Counsel to Florida Attorney General Bob Butterworth. Does this country really want citizens who can gamble away their savings on the internet?
The third question was, ''What steps has the National Council on Problem Gambling taken to date to curb the abuses associated with internet gambling?'' Mr. Keith Whyte told you some of those things. I don't know the whole question. I resigned from the National Council due to philosophical differences many years ago. I do know that there is a strong cooperation of the National Council with the casino industry.
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The fourth question was, ''What recommendations do you have for this subcommittee on steps Federal and State authorities should take to address internet gambling?'' First of all, I would recommend, as also recommended by the National Gambling Impact Study Commission, putting a moratorium on all expansion of legalized gambling, including internet gambling.
Chairwoman KELLY. Dr. Lorenz, if you could sum up, please, we would appreciate it.
Dr. LORENZ. Thank you. I further recommend that the governments and Congress address all the issues and public policy relative to legalized gambling and compulsive gambling, recognize the escalation of gambling addictions, provide the funds through top-level administrative support just as you've done with alcoholism and drug addiction. Fight compulsive gambling, don't condone it. I would be happy to answer any questions.
Chairwoman KELLY. Thank you very much.
We turn now to Mr. Frank Fahrenkopf, Jr. We appreciate your being here, sir.
STATEMENT OF FRANK FAHRENKOPF, JR., PRESIDENT AND CEO, AMERICAN GAMING ASSOCIATION
Mr. FAHRENKOPF. Thank you, Madam Chairwoman. The American Gaming Association is the national trade association of the commercial casino industry. Our members are the companies with household names to many, such as Harrah's, MGM Mirage, Mandalay Resort Group, Park Place Entertainment. We operate land-based and riverboat casinos in 11 States across the country.
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Consideration of questions about internet gambling we believe must be viewed in light of the nature of gaming and how decisions about public policy issues concerning legal wagering have been handled ever since the founding of this Republic and we believe should be continued to be resolved that way in the future.
As the National Gambling Impact Study Commission reaffirmed in its final report in 1999, except for certain limited areas, such as internet gambling and Native American gaming, States, not the Federal Government, should decide whether to permit legal wagers by persons within their States, and if so, how to license those in the wagering business and how to tax and regulate their operations.
Our major concern with internet gambling as it exists today is that it allows offshore websites that accept bets and wagers to frustrate important State policies, including restrictions on the availability of gaming within each State. Similarly, unregulated internet gaming that exists today allows an unlicensed, untaxed, unsupervised operator to engage in wagering that is otherwise subject to stringent Federal and State regulatory controls. These controls are vital to preserve the honesty, integrity and fairness that those in the gaming industry today have worked so hard for so long to bring about.
The importance of this concern cannot be overstated. As the U.S. Department of Justice has stated before Congress on several occasions, the law should treat physical world activity and cyber activity over the internet in the same manner, whether it comes to gambling or otherwise. As the Justice Department pointed out in testimony to the Senate Indian Affairs Committee in 1999, and I quote, ''If activity is prohibited in the physical world but not on the internet, the internet will become a safe haven for that criminal activity'', unquote.
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In addition to State level restrictions on where legal wagering may take place, and extensive licensure and regulation of those who engage in the business of taking legal wagers, there are important Federal requirements applicable to commercial casinos and other forms of legal wagering in this country. For example, U.S. commercial casinos are subject to Federal corporate taxation. Publicly traded companies comply with financial disclosure and other Securities and Exchange Commission rules. Casinos file information reports on larger winnings with the IRS and withhold Federal taxes on certain winnings.
And casinos, very importantly, adhere to anti-money-laundering statutes and regulations administered by the U.S. Treasury Department's FINCEN Division. By contrast, those engaged in the business of illegal internet wagering in the U.S. from offshore are not subject to U.S. law enforcement jurisdiction on these important matters of public administration.
Now while the AGA could support appropriately drafted legislation to update Federal statutes to preserve the traditional policy of State regulation, any changes to Federal or State laws in the pursuit of making internet gambling illegal need not and should not be drawn so broadly as to lump the use of technology within otherwise legal limits in the same prohibited status as those who are doing so outside State law.
This position is consistent with the policy of the Wire Communications Act, which since the 1960s permits the use of the wires for wagers and information, assisting in the placing of wagers, where the transactions are entirely intrastate or between States in which the wagering in question is legal.
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In other words, there is a difference between using technology to circumvent Federal and State restrictions and regulations as is done today by those operating offshore internet gambling sites, and the use of technology by licensed operators to more efficiently deliver their services where, to whom, and under what conditions they are authorized by Federal and State law to do so.
There are clearly understandable enforcement concerns that this subcommittee must deal with. But it is important also to point out that the commercial casino industry has been at the forefront of tackling the difficult problem of pathological gambling that some of the other witnesses have testified to. The National Gambling Impact Study Commission actually commended our industry for its work in being the primary funder of research on this disorder. And I ask you to go back and look at that Commission report. A lot of people have been throwing things around like bankruptcy and crime and suicide and divorce. That's not the findings of the National Gambling Impact Study Commission, except to that 1 percent of the population who are defined as compulsive and pathological gamblers.
The position of the AGA is that we continue to oppose unregulated internet gambling, because we believe the technology does not currently exist to prevent underage gambling, to protect against pathological gambling, and to permit the strict regulation and law enforcement oversight required for integrity.
Thank you very much, Madam Chairwoman.
Chairwoman KELLY. Thank you very much. And thank you for staying within the time limit.
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I want to just ask a couple of questions. We are going to ask a few questions, then we are going to go vote. We will come back to finish.
Mr. Suarez, as I understand it, during your investigation of offshore internet gambling, 15- and 17-year-old kids were able to set up accounts and place bets from computers in New Jersey. Is there anything we can do to prevent minors from having access to an offshore casino?
Mr. SUAREZ. Madam Chairwoman, we were able to have those underage kids gamble. And the real obligation to do that screening really falls on the operators themselves. In these cases that we had, we had the children enter their correct birth dates. And on two of the sites, they were told—the site reported back that they were underage, and changing only the age description in the field, the child simply said, ''I'm 21'', and he was allowed to wager and place wagers on those games.
In the other circumstance, we were actually just told, don't come in if you're under 18, and we clicked on the screen, ''I agree that I am over 18'', and we got right in. There is nothing except for the technology that may permit parents to screen certain ISPs or certain home pages that could be done. But the operators can simply avoid that by identifying their screen in a different way.
The screening software, the nanny software, requires cooperation from the operator and the parents.
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Chairwoman KELLY. Thank you. I just want to follow up with one question about the fact that law enforcement authorities have talked with me and raised some concerns about the potential for money laundering and other financial crimes in connection with internet gambling. Can you explain how internet gambling lends itself to money laundering?
Mr. SUAREZ. Probably the easiest way that we can see it is that there is no guarantee on the side of the house, the internet casino, that they are complying with the reporting requirements of Federal law, be that for cash deposits, cash transactions, or the movement of money to and from other accounts that may be offshore through to the accounts themselves.
The most common way that an internet casino pays a wager is that they can credit up to the amount that a person originally put down, then they send a check in the mail. And so there is no way that we in the United States can track how many transactions, where the money is coming from, any paper trail that we can go to to these internet sites, because we simply don't have the ability to capture the information or to guarantee that those casino sites, internet sites, are properly capturing information that they would be required to capture were they a land-based operator.
Chairwoman KELLY. Thank you very much. Dr. Lorenz, I would like to know if you would be willing to share with us, in generalities if necessary, any cases that you have worked with involving internet gambling.
Dr. LORENZ. Yes, Madam Chairwoman, I can tell you of a current case. This is a police officer who served very commendably in a nearby county, a very large county, also very large police department. He had a very stressful job, and he went to gambling on the internet in order to relieve that stress.
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I had hoped to bring him here today, but he is facing legal charges, and his attorney suggested it was not a good idea at this time. You can imagine that this police officer is extremely embarrassed because the men he worked with for 30 years now have to arrest him and take him to prison.
I have a paper here. We have our patients fill out a sentence completion form. Let me just read some of the sentences that he completed. ''I think gamblers are''—and he says, ''sick people who haven't realized their sickness.'' And that is very true.
''I am fearful of my future until I get help.'' This is a man who for 30 years was a police officer. ''I am not going to commit suicide,'' although he had tried, and the last thing that stopped him is that his fellow officers would find him.
''Most people don't know that I tried to stop gambling many times.''
Question five: ''The most unusual experience I have ever had while gambling,'' was using other people's money. He stole over $100,000 from his police department.
Question six: ''People who see me when I am gambling think I am just playing on the internet.''
Chairwoman KELLY. Thank you, Dr. Lorenz. I appreciate that.
Dr. LORENZ. One more question? One more statement?
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Chairwoman KELLY. I've run out of time. I appreciate it. I am going to turn to Mr. Gutierrez, and if you would like to continue this, please do.
Mr. GUTIERREZ. Sure. I just have a couple of questions to Mr. Peter Suarez, John Peter Suarez.
In Mr. Fahrenkopf's written testimony, he basically says that he's not concerned about internet gambling in terms of competition from internet gambling because he cites that they go for the hotels and all the excitement and everything else that goes along with gambling.
However, you have mentioned in your remarks that the rise of internet gambling could threaten the success and reduce revenues of those strictly regulated casinos in Atlantic City. Could you explain the difference?
Mr. SUAREZ. New Jersey's gaming market is unique in that gaming in New Jersey is limited to the city of Atlantic City and cannot take place anyplace else. So if you want to gamble, you must come to Atlantic City to one of the 12 licensed casinos, unlike Nevada, where gaming is pervasive throughout the State. I don't want to speak for Mr. Fahrenkopf, but I believe that is the distinction in that the operators in New Jersey have committed substantial resources and investment in developing Atlantic City.
And for a patron who ordinarily would drive down the parkway or the Atlantic City Expressway to come, if they could avoid that by simply logging on, then I think by all accounts, we don't know the extent of the impact, but I think we all recognize that there would be a negative impact in the gaming market in New Jersey.
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Mr. FAHRENKOPF. Mr. Gutierrez, the average stay in Atlantic City is something like 10 hours. The average stay in Las Vegas is 3 days.
Mr. GUTIERREZ. OK.
Back to Mr. Suarez. If prohibition of internet gaming was chosen as the course of action by the State or Federal Government, how could this prohibition be enforced?
Mr. SUAREZ. The prohibition would have to be accompanied by the tools that you have identified, which is, as the National Gambling Impact Study Commission recommended, to simply make wagers that are placed over the internet and the obligations associated with those uncollectible in the United States. That simple declaration of policy and laws to that effect would render I think the profitability of internet gaming—it would render it virtually unprofitable if an operator could not effectively come to the United States and try to collect that debt, because that debt is unenforceable in the courts in the United States.
Mr. GUTIERREZ. And following up with Sebastian Sinclair, if prohibition as you've emphasized throughout your written statement, would be very hard to enforce, and you suggested, quote, ''may be a poor policy choice for internet gaming'', then what would be the right, foolproof choice for the Government to protect individuals interested in internet gaming.
Mr. SINCLAIR. Well, I think I answered that when I stated that there is no foolproof answer as I see it.
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This legislation assumes a debt-based transaction. Credit cards are not the medium for this industry, and they never will be, because gambling debts already are uncollectible in a great portion of the First World, the State of Michigan, for instance. You'll simply be pushing it to different mediums of exchange.
Now the way I see it, as I said before, keep your friends close and your enemies even closer; there is no good answer, but there is a lesser of two evils. And I think a real concern and a real problem that is associated with gambling is problem and pathological gambling as we've heard about a lot on this subcommittee.
But it is my opinion and my belief that by trying to prohibit this activity in a way very similar to the Volstead Act, the cure will be worse than the disease. You can't legislate away demand, and on the internet, it's difficult to legislate away supply. You're going to hand this industry to suppliers who aren't concerned about problem and pathological gambling, and it's going to maintain.
Mr. GUTIERREZ. Well, we don't want to gamble any more with the time we have to go vote. I think we have 4 minutes and we're both pretty healthy and swift, but let's get over there to vote. We'll be right back. Thank you.
Chairwoman KELLY. Thank you. We will take a 10-minute break and resume.
[Recess.]
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Chairwoman KELLY. Thank you very much. I apologize for such a long delay. May we have our witnesses back?
I understand Mr. Fahrenkopf had to leave. We will have to give him some written questions. But since I have completed my questions, with unanimous consent, Mr. Leach, would you like to open your line of questioning?
Mr. LEACH. I don't have exactly any questions for the panel, but I would like to read a very brief long sentence or two sentences, because it relates to some things that have been said with regard to several of the comments about the possibility that third party intermediaries such as PayPal may obviate the effectiveness of legislation like H.R. 556 that makes it illegal to use financial instruments for illegal internet transactions. Let me be clear that H.R. 556 also makes it illegal to use the proceeds of credit or to extend credit on behalf of any other person or to use the proceeds of any financial transaction for illegal gambling.
What this means is that third party intermediaries like PayPal would be captured under the enforcement mechanisms of the Act. Now PayPal kinds of transactions would be treated the same as direct credit card transactions. And I just want to stress that this particular kind of effort to get around the prohibitions of the Act, I don't think, would be very effective.
Second, several people have asked me something about my opening statement that related to the Visa testimony to come. And we are going to be under some very awkward time constraints on some voting. So let me just make it clear what I was getting at. I am nothing less than astonished that a credit card company, of all kinds of companies, would testify that it objects to these kinds of payment mechanism approaches. Because what is at issue here for credit card companies is not simply the legal subtleties of how you comply, but the fact if you don't have this situation, you are going to massively increase the number of bankruptcies in America. You are going to massively increase the number of credit card indebtedness, and nothing could be less advantageous to the vested interest of a credit card issuer. And so it is my personal view that of testimony I have read, I have never seen testimony that is less in the vested interest of the party that is projecting it.
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And having said that, I would also say, I am absolutely astonished at the lack of interest to date of the financial intermediary community. And by that I mean America's banks, America's savings and loans, America's insurance industry. Every single one of these industries has a spectacular interest in not seeing the problems in American society that are beginning to evidence themselves.
I cannot think of a higher priority for the American banking industry than legislation of this nature. And it is just extraordinary the silence that has greeted it, both in the last Congress and this Congress. And I think that the American Bankers Association, the Independent Bankers Association, the insurance industry have really got to look at these circumstances and come to a conclusion what's in the best interest of American society and what's in the best interest of the financial well being of American civic life. And I think we have to be very concerned.
When the Chair reads a statistic that says that a million people gamble a day, I would stress in a society of about 300 million people, that that isn't 1 million people one day and another million people the next, it is a million people that repeat and repeat and repeat. And given the odds that exist in gambling, the greater the amount of volume of gambling, the greater certainty is of the greater the loss. The odds are against the public. And I think it's an absolute duty of the United States Congress to say that the public ought to be protected from odd circumstance that are stacked against it.
And I want to say to this panel, I am very appreciative of the testimony of many of you who are deeper into this subject than I have ever been and have seen first-hand results of a very deep nature.
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But my concern, Madam Chairwoman, is that the horse is out of the barn. The question is, can we get it back in? And if we don't get it back in, what kind of wagon it's going to be dragging with us in the years ahead. And I think it's up to the United States to lead. I think it's up to the United States to lead for ourselves and in the international community with approaches of this nature. And I don't know any other approach other than payment mechanism approaches that are effective on enforcement and that can be replicated easier in other countries in the world. And that is why to me it is so important.
Beyond that, I don't have any questions for this panel, because this panel has been so forthcoming and direct and thoughtful in their presentations to the subcommittee. And I want to thank you very much, Madam Chairwoman.
Chairwoman KELLY. I thank you, Mr. Leach.
There are obviously no more questions for this panel, and I really thank you for your indulgence for the long wait that we had. It was unexpected. Since there are no more questions for the panel, the Chair notes that some Members may have additional questions, and they may wish to submit those in writing. Without objection, the hearing record is going to remain open for 30 days for Members to submit written questions and witnesses to place their responses in the record.
Oh, Mr. Goodlatte, you just got here? Do you have—all right. Thank you.
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I want to again thank this panel for their time and patience with us. The first panel is excused with the Subcommittee's grateful, grateful gratitude. And we are going to take just a quick break so that we can have the second panel take their seats. Thank you all very much.
[Recess.]
Chairwoman KELLY. For our second panel, we are very grateful that Mr. Bill Saum could join us. He is the Director of Agent Gambling and Amateurism Activities for the National Collegiate Athletic Association. He is going to discuss the effect of internet gambling on amateur sports, the integrity of the games, and the athletes.
Next we are going to hear from Mr. Mark MacCarthy, the Senior Vice President of Public Policy for Visa U.S.A., Incorporated, who will discuss the challenges to the credit card industry with internet gambling and the accompanying credit card use.
Then we are going to hear from Ms. Sue Schneider. She is the Chairman of the Interactive Gaming Council, which represents manufacturers and licensers of software used to enable internet gambling to function.
Then we are going to have Ms. Penny Kyle, the Executive Director of the Virginia Lottery and the President of the National Association of State and Provincial Lotteries. She will share with us the perspective of the State lotteries.
And finally, we will hear from Mr. Greg Avioli, the Deputy Commissioner of the National Thoroughbred Racing Association, who will share with us the perspectives of the horseracing industry.
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I want to thank all of you for taking time out of your schedules to be here with us today and to share your thoughts with us, and I certainly do thank you for your patience in waiting to appear on this panel. Let us begin with you, Mr. Saum.
STATEMENT OF BILL SAUM, DIRECTOR, AGENT GAMBLING AND AMATEURISM ACTIVITIES, NATIONAL COLLEGIATE ATHLETIC ASSOCIATION
Mr. SAUM. Madam Chairwoman and Members of the Subcommittee, thank you for the opportunity to testify on behalf of the National Collegiate Athletic Association and to share with you our concerns related to the growth and impact of sports gambling on the internet.
The NCAA is a membership organization consisting of nearly 1,000 universities and colleges and is devoted to the regulation and promotion of intercollegiate athletics for over 300,000 male and female student-athletes.
Though the growth of internet gambling has seemingly sprouted overnight, this is not a new issue for the NCAA. For the past 4 years, we have worked with House and Senate sponsors in an effort to adopt legislation that would in part ensure that all sports gambling on the internet is prohibited in this country. Why? The answer is quite simple. When people place wagers on college games, there is always the potential that the integrity of the context may be jeopardized and the welfare of the student-athletes may be threatened. For example, many of you are aware of the recent point-shaving scandals on the campuses of Northwestern University and Arizona State University. While these cases occurred before the rise of the internet gambling industry, the impact of these sports gambling incidents must not be minimized. Many, many dollars were wagered on these games. The result? Several of the student-athletes involved were indicted and sentenced to time in a Federal prison. Coaches and teammates were betrayed, and the two schools have seen their reputations tarnished. It is clear that sports gambling is not a victimless crime and that the potential for similar incidents to occur has increased now that sports bets can be placed on the internet.
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Perhaps the most frustrating aspect of internet gambling is that while we all acknowledge the wondrous benefits of the internet age, it also has presented some significant challenges. Today this new communications medium, the internet, allows online gambling operators to circumvent existing U.S. laws aimed at prohibiting sports gambling. This is why we believe that new Federal legislation is needed to address the rapidly transforming world of gambling in cyberspace.
As you listen today to witnesses arguing the pros and cons of internet gambling, please do not overlook the potentially harmful impact of this activity on young people. A growing consensus of research reveals that the rates of pathological and problem gambling among college students are three times higher than the adult population. This fact surely did not go unnoticed when the National Gambling Impact Study Commission recommended a Federal ban on internet gambling in June of 1999.
Just 4 years ago, when the NCAA became involved in the legislative effort to ban internet gambling, there were only four dozen internet gambling sites. Now there are 1,4000 unique internet gambling websites. Today college students are perhaps the most wired group of individuals in the United States. They can surf the web in their school library, in the computer lab, or in the privacy of their dorm room. The emergence of internet gambling enables students to wager behind closed doors, anonymously, and with the guarantee of privacy. Furthermore, the ease and accessibility of internet sports gambling creates the potential for student-athletes to place wagers over the internet and then attempt to influence the outcome of the contest while participating on the court or playing field.
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If left unchecked, the growth of internet gambling could be fueled by college students. Today college students are armed with the means to gamble on the internet. A year 2000 study by Nellie Mae indicates that 78 percent of college students have credit cards. Thirty-two percent have four or more, and that the average debt for these undergraduates is approximately $2,750 per card.
In my position as the NCAA Director of Agent, Gambling and Amateurism Activities, I have seen how students are falling victim to the lure of internet sports gambling. Offshore operators continue to implement aggressive marketing tactics. There are billboards promoting internet gambling sites across the country. Student-athletes continue to complain about receiving unsolicited e-mails for sports gambling websites. And there have been reports of individuals passing out flyers touting internet gambling opportunities at fraternity houses.
I have spoken with students who have lost thousands of dollars on the internet. In fact, last year at a congressional hearing, we played a videotape account of a college student who in just 3 months lost $10,000 gambling over the internet. Please be assured that this is not a unique experience. We have heard from others with similar stories.
Finally, our staff is beginning to process NCAA rule violation cases involving internet sports gambling. On the legislative front, the past four years have been marked by frustration. Those supporting efforts to adopt the legislation have come very close to achieving their goal, but in the end have been thwarted by aggressive and well-financed opposition. The real challenge in crafting legislation——
Chairwoman KELLY. Mr. Saum, you have run out of time. Can you summarize, please?
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Mr. SAUM. Yes. The real challenge in crafting legislation that will not only address the problems associated with internet gambling but also provide an effective enforcement mechanism will have an impact on these offshore operations. The NCAA urges the Subcommittee and Congress to not let this opportunity slip away, and thoughtful legislation may be successful in significantly curtailing this growth and popularity of internet gambling in this country. Thank you.
Chairwoman KELLY. Thank you very much.
Mr. MacCarthy.
STATEMENT OF MARK MacCARTHY, SENIOR VICE PRESIDENT PUBLIC POLICY, VISA U.S.A. INC.
Mr. MACCARTHY. Thank you, Chairwoman Kelly and Members of the Subcommittee.
The Visa Payment System is the largest consumer payment system in the world. The over one billion Visa cards issued by our 21,000 members are accepted at over 20 million locations.
Chairwoman KELLY. Mr. MacCarthy, can you pull that microphone a little more closely to you, please?
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Mr. MACCARTHY. Is that better?
Chairwoman KELLY. Thank you. Much better.
Mr. MACCARTHY. The over one billion Visa cards issued by our 21,000 members are accepted at over 20 million locations to buy over $1.8 trillion worth of goods and services every year. In the U.S. alone, cardholders use Visa cards to buy over $90 billion worth of goods and services.
Visa recognizes that internet gambling can raise important social issues, especially access by problem and underage gamblers. Also, while internet gambling represents only a negligible part of our total transactions, it imposes disproportionate legal and operating risks for Visa and for its members.
So Visa has taken steps to address internet gambling. Visa card issuers must advise cardholders that internet gambling may be illegal in their jurisdiction and that Visa cards should only be used for legal transactions.
Visa also cooperates with law enforcement agencies in their efforts to prosecute illegal domestic internet gambling operations. And Visa has taken steps to enable card issuers to block potentially illegal internet gambling transactions.
Visa requires internet gaming merchants to use a combination of codes that tells the card issuer that a transaction is likely to be an internet gambling transaction, and this allows a card issuer to deny authorization for these transactions. The sheer volume of transactions that Visa handles requires it to rely on this merchant code. The Visa operating system operates at a pace of 35.5 billion transactions per year. Visa processes an average of 2,500 messages per second and has a peak capacity of 4,000 messages per second.
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Our coding system has limitations. For it to work, merchants must accurately code transactions. Visa merchants are required to properly code, and there are penalties for failures to do so, but there are obvious incentives for unscrupulous internet gambling merchants, to try to hide from Visa and from its members.
Coding only informs card issuers that the transaction is likely an internet gambling transaction. It does not tell us whether the transaction is illegal. For example, U.S. cardholders visit foreign countries where internet gambling is authorized and where the use of credit cards to pay for online gambling is entirely legal. Online gamblers often use electronic cash for auctions, online purchases or for internet gambling. The coding system that Visa uses would not capture these transactions as internet gambling transactions.
We believe that partly as a result of these efforts, these alternative forms of payment are becoming a payment system of choice for internet gambling. I was pleased to notice that other witnesses have made this same point in their testimony.
Under current law, it is impossible to determine quickly and efficiently whether a particular internet gambling transaction is illegal. Part of the problem is ascertaining exactly where a cardholder originates the transaction.
Going forward, we believe that the responsibility for illegal acts should be placed squarely on the shoulders of the illegal actors themselves—the gamblers and the casinos that engage in illegal gambling operations. Making payment systems responsible for policing internet gambling does not provide a practical and effective solution for this complex social problem. And it is hard for us to see how Congress can address payment systems and internet gambling without clarifying the underlying legal landscape. A law that makes all internet gambling illegal would be hard for us to enforce and would raise significant cross-border jurisdictional issues.
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But the fundamental point is that if policymakers declare internet gambling illegal, unscrupulous merchants will simply stop coding their transactions accurately, and we will have no way of knowing which transactions are internet gambling ones. Conversely, a more complex law that allows for multiple exceptions for a ban on internet gambling, such as allowing internet gambling on an intrastate basis or permitting certain types of gambling, such as parimutuel betting, would be impossible for us to enforce. No coding system could possibly reflect all these variations.
Thank you for the opportunity to testify before you today, and I would be happy to answer any questions.
Chairwoman KELLY. Thank you very much, Mr. MacCarthy. You have certainly given us some food for thought.
Ms. Schneider.
STATEMENT OF SUE SCHNEIDER, CHAIRMAN, INTERACTIVE GAMING COUNCIL
Ms. SCHNEIDER. Madam Chairwoman and Members of the subcommittee, I have served as the Chairman of Interactive Gaming Council since its formation in 1996, and I would like to applaud you for holding this hearing to learn more about this very complex subject and to really educate yourselves about the public policy issues that are opened here. It is a situation where it is very complex. It is international in nature and can be very complicated.
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The IGC itself is a not-for-profit trade association with over 100 member companies from around the world. These are companies that are operators, software suppliers, e-commerce providers, or like my own company, we provide information services.
The mission of the organization is to provide a forum for what we consider to be the legitimate participants in the industry to work toward uniform standards for those participants on an intergovernmental basis and to provide a unified voice to advocate for the interests of both the members and the consumers who enjoy our services.
I have included in the appendix some things that I think you might find of interest: A Code of Conduct, Responsible Gaming Guidelines, and most recently, a Seal of Approval program that has been adopted by the IGC, and members are beginning to participate in that.
We feel that neither governments nor consumers will tolerate an industry that doesn't extend adequate protections to its consumers, and I think that's something where we agree with policymakers, is how do you extend those protections? I can tell you from having worked with an information publication that was consumer-oriented, consumers are concerned about two things: Are the games fair? Is their betting fair, and will they get paid? And those are the common things that they are most concerned about. And it is something that again takes international exposure and cooperation here.
What we are not are an association of members who set up shop, take off with the dollars and run. And quite frankly, there have been very few instances of that in an industry that's been having the kind of growth that has existed over the last few years.
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We are also not unaware of and not insensitive to the issues of underage or problem gambling. And quite frankly, some of the technology that exists allows for the kind of tracking of that, particularly when it comes to some of the issues of compulsive gambling, loss limits, self-exclusionary type of things, a variety of things like that, which we can get into more in the question-and-answer session if you would like to learn more about that.
As we mentioned, there are at least 54 jurisdictions around the world that offer sanctioned internet gambling in some way, and we have included that list in there also. Countries such as Great Britain and South Africa are now exploring regulatory structures. And again, we work with the international body of gaming regulators to look at baseline standards so that there is some consistency there.
As you are likely aware, Nevada, for example, and even New Jersey have had legislation introduced, and Nevada passed to allow for regulatory structure if they can be guaranteed that certain controls are in place.
I have added some information on the size of the industry and again, I think Sebastian covered that quite a bit, so I'll move by that.
But I do want to say again to reiterate that the demand is within the U.S. in terms of the market for these services. And I think what that does is really make the public policy issues even more of a challenge. But among those, we feel that both the State versus Federal oversight, those tensions on who does have oversight of this, is something that needs to be openly discussed. Looking at the location of where the gambling transaction takes place and the jurisdictional issues there, and again, trying to get some harmonization of regulations.
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I think the whole issue of the financial transactions is something that we have to look at very carefully. Do you want to be a chokepoint and really put out to the international world that that sort of thing happens. I know there's a lot of inconsistencies to a certain extent when you look at like the French Yahoo case that some of you may be familiar with. Some of those kind of issues, you get into that interplay of trying to control a medium that has been set up to not be controlled. And those are the kind of concerns that I think are of essence as you look at using financial transactions as a control point.
And as you have also heard, that the whole issue of coming up with more anonymous e-cash services as a result of those kind of restrictions are something that will probably be a reality there.
I do want to mention that there are two things that I would ask that you keep in mind. One, as we've mentioned before, the Volstead Act, and trying to curb demand in that regard when you have some people, a number of people in America that are looking at that as an opportunity for an entertainment that they want to take advantage of. And I think the other thing to look at is how Las Vegas has evolved. It started out, you know, you talk about the Wild West. That was the Wild West there, and it has now evolved through a regulatory structure that has been I think a benefit to consumers, and that's what we want to advocate for.
Thank you very much.
Chairwoman KELLY. Thank you very much, Ms. Schneider. I apologize for cutting you off and cutting you short on your testimony, but you know your written testimony is already a part of the record, and we will be asking questions.
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Ms. Kyle.
STATEMENT OF PENELOPE W. KYLE, EXECUTIVE DIRECTOR, VIRGINIA LOTTERY; PRESIDENT, NATIONAL ASSOCIATION OF STATE AND PROVINCIAL LOTTERIES
Ms. KYLE. Good afternoon, Madam Chairwoman, Congressman Leach and Congressman Goodlatte. My name is Penny Kyle, and I am serving this year as the President of the North American Association of State and Provincial Lotteries. This is the group that represents every U.S. lottery, of which there are now 39; the six provincial lotteries of Canada, the National Lottery of Mexico, and the lotteries in the Virgin Islands, Puerto Rico, and Jamaica.
I am here today, first of all, to tell you that the 39 U.S. lottery directors actively support what this subcommittee is trying to do. We think that the issue of addressing illegal and unregulated internet wagering needs to be undertaken, and we applaud your efforts.
As State lottery directors, our members operate under some of the most stringent legal and security standards in the world. And we do this because as State governments, we believe it is in our best interest if we are to maintain the high level of public trust that we currently have with our citizens in our various jurisdictions.
Therefore, your efforts to outlaw illegal internet operations are welcomed and supported by those of us who currently adhere to the legal wagering rules.
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It should be noted that this organization has not taken a for or against position regarding the sale of lottery tickets on the internet. We feel this is a position that must be taken by each of the individual States to determine the forms of regulating its own gaming as well as the methods that are offered in that State.
My goal in appearing before your subcommittee today is to make one key point to you. That is that NASPL cannot support any internet legislation that would preempt the right of the Nation's governors and State legislators to either prohibit, authorize, or regulate gaming within their own borders.
Since the inception of the first modern lottery in New Hampshire in 1964, State meeting governments have had the right to authorize and regulate their State lotteries. They write billions of dollars for good causes, such as education, the environment, and senior citizen programs.
We stand by the statement made by the National Governors' Association, and I quote as follows:
''States possess the authority to regulate gambling within their own borders and must continue to be allowed to do so. An incursion into this area with respect to on-line gambling would establish a dangerous precedent with respect to gambling in general as well as broader principles of State sovereignty.''
It should be noted that there are several State lottery members of NASPL who are opposed to offering State lottery products over the internet. These States feel very strongly about this issue and would oppose any attempt to authorize any such games.
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On the other hand, there are some NASPL State lottery members who feel that there may come a time in the future when it is appropriate to offer such games. I make this point, Madame Chairwoman, to illustrate an important common theme among our membership. All of us may not agree on the value or the appropriateness of offering lottery products on the internet, but we are united in the belief that it is clearly each State's right to authorize and regulate its own lottery and the methods of selling its own lottery products.
In conclusion, I would ask that this subcommittee and other relevant congressional committees, while addressing the issue of illegal and unregulated internet gaming, please respect the historical right of States to authorize and regulate gaming within their own boundaries.
I thank you again for allowing me to represent the views of the North American Lottery Industry.
Chairwoman KELLY. Thank you very much, Ms. Kyle.
Mr. Avioli.
STATEMENT OF GREGORY C. AVIOLI, DEPUTY COMMISSIONER, NATIONAL THOROUGHBRED RACING ASSOCIATION
Mr. AVIOLI. Thank you, Madame Chair.
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I'm testifying today on behalf of the National Thoroughbred Racing Association which is the national organizing body for the sport of thoroughbred racing, which represents the interests of racetracks, owners, and breeders. Horseracing and breeding in the United States is a major agri-business. It currently employs nearly 500,000 full time employees and has an annual economic impact of over $34 billion on the U.S. economy.
Wagering on horseracing is permitted in 43 States and generates over $500 million each year in State and local taxes. Racing is also a very popular spectator sport, with over 30 million fans coming to the races last year and that's second only to major league baseball.
Prior to 1970, wagering was only available to patrons who were live at the racetrack. In 1970, the New York Legislature authorized off-track wagering. Since that time, all 43 racing States have authorized the tracks in those States to send pictures of their races to other States. That's a process known as simulcasting.
As part of the growth of simulcasting, racing improved its product by starting a process known as ''common pooling'' where they would combine many betting pools in one or more jurisdictions. This process uses sophisticated computer networks and now relies heavily on the internet to transmit the information.
Another technological advance for racing over the last few decades was the development of advanced deposit or account wagering where a person can set up an account with a licensed facility and then wager from another location. Currently, 11 States have authorized this account wagering.
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I bring this up because racing's use of modern technology I've just described has allowed the racing industry, and the $34 billion agri-business it supports, to survive in a very competitive gaming environment.
As a statistic, about 50 years ago, racing had 100 percent of the legal gaming market in the United States. As we sit here today, it's less than 5 percent. Throughout history, the prohibition or legalization and regulation of gaming has been primarily left to the States and not to the Federal Government. In this regard, wagering has been regulated on the State level for 75 years.
In 1978, the State regulation of horseracing was supplemented by the Federal Government in a very specific way with the passage of the Interstate Horseracing Act of 1978. In that Act, Congress stated in its congressional findings that it is the policy of Congress to regulate interstate commerce with respect to wagering on horseracing in order to further the horseracing and legal off-track betting industries in the United States.
Just last year, Congress amended the Interstate Horseracing Act to clarify that interstate simulcasting and account wagering can be conducted via telephone or other electronic means which would include the internet where lawful in the States involved. This was just in the last Congress.
Again, similar to the other speakers you've heard today, our industry feels very strongly that the regulation of all forms of gaming is essential to protect the public and assure compliance with applicable laws. We are adamantly opposed to any unregulated gambling whether via the internet or any other medium.
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In the last decade, the internet has been used by offshore unregulated entities who have pirated money from licensed racetracks in the United States. These operations are able to offer more attractive betting propositions because they don't pay U.S. taxes and they don't pay the revenue shares that currently go back to support racing and purses in this country.
It's been estimated that this year, as much as $750 million of what otherwise would be a total of $15 billion will be wagered offshore. That is a $750 million gaming loss to the licensed industry in the United States.
In light of the posed threat to our industry from internet gambling, we have supported a number of congressional initiatives in the last few years to curb illegal internet gambling. We've worked closely with Congressman Goodlatte last year. As a result of participating in the legislative process, however, we are aware that any legislation dealing with this issue will have very technical legal issues, and we are concerned that imprecisely or improperly drafted legislation could have an unintended effect.
For example, some legislation last year, without intending it, would have outlawed the legal business of simulcasting, which had nothing to do with the internet, but because computers that were included in the definition of the internet are used in simulcasting, that bill would have, on its face, outlawed the core business that we have today.
That's a good ending point.
[Laughter.]
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Chairwoman KELLY. Thank you very much.
I'm going to ask one question very quickly.
I would like to ask Mr. Saum about whether or not you are aware of a study that was done by the student journalists at Santa Clara University that came up with numerous instances of students racking up huge credit debts gambling. Some of this apparently was done on the internet.
I have here a story that the students wrote, and I'm going to request that it be made a part of the hearing record.
Chairwoman KELLY. Are you aware of this and would you like to elaborate on that?
Mr. SAUM. Yes, ma'am, we are aware of it. We've been in communication with a few of the authors of this article, and it's fascinating from the stance that they actually began as a report for one of their classes, they began by sharing some of their own stories, and then they went out and started interviewing other students in the Silicon Valley area. From one student, they expanded it to other students, and the stories that they heard were rather alarming. They heard the stories of the easy access to the internet, the easy access using their credit cards. When they maxed out their credit cards, they were given new credit cards and from there the debt rose to the level of thousands of dollars. And several of the kids were in the tens of thousands of dollars area.
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Chairwoman KELLY. Thank you very much.
I want to know, I have one other question here. Mr. Suarez indicated—and this is a question for Ms. Schneider—Mr. Suarez indicated that 15- and 17-year olds were able to access offshore internet gambling sites during an investigation that they conducted. Yet, I see that one of the items in your Code of Conduct says that members will institute controls that require customers to affirm that they are of lawful age in their jurisdiction, and that they will institute reasonable measures to corroborate that information. It sounds like some of the offshore sites are not complying with your code.
My question really is whether or not there is any way to design software in such a way that you're going to be able to exclude money laundering and kids from using the site. These people who are non-compliant, are they members of your IGC?
Ms. SCHNEIDER. The three they had targeted are not members. This is the problem with a voluntary trade association, quite frankly, is you can't get 100 percent of the people in. That's why regulation is an optimal solution in that regard.
In terms of what you can do in terms of underage gambling, what a number of operators do is go through kind of a vetting process. When you open an account, they can require and do require copies of passports or birth certificates or that sort of thing, to be able to get a sense of documentation of the age of that particular player.
Down the road, there are things coming now in terms of biometric encryption tools to make sure that the person that established the account is indeed the person that's playing. So you do have a situation there where there are technological tools that are being developed now that will assist with that.
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Mr. LEACH. [Presiding] Thank you very much.
Mr. Goodlatte, do you have any questions?
Mr. GOODLATTE. Thank you, Mr. Chairman.
Ms. Schneider, let me follow up on that question. Are you saying that everyone of your 100-member organizations presently requires submission of some kind of documentation, like passports or birth certificates, before they will allow anybody to obtain membership or whatever you require, each one of those organizations requires to bet on-line?
Ms. SCHNEIDER. I'm not saying that. Number one, not a hundred of the members are all operators.
Mr. GOODLATTE. Of the ones that are operators.
Ms. SCHNEIDER. I can't say with any certainty. I think you have the same problem in the hearing that came up last year with the racing industry in terms of whether they were all compliant with taking wagers only from those 8 States.
When you have a volunteer association, you can't do it. It's something we would hope for.
Mr. GOODLATTE. Have you checked on that?
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Ms. SCHNEIDER. Have we checked on it? We know that the leading ones that do a big volume do have those kind of controls in place.
Mr. GOODLATTE. If you are capable of doing that to screen out people who are minors, you would similarly, from the same information provided to you, have the ability to screen out people who are placing those bets from the United States or who are United States citizens.
Do any of those organizations do that? Do any of them attempt to not engage in illegal gaming in the United States which I think virtually every legal scholar that I'm aware of believes it is illegal to do in the United States under the current law, to say nothing of any law we might introduce now.
Under current law, I know some individuals have been prosecuted for that very violation. Do any one of the members of your organization screen out United States citizens because they know that it's against the law to engage in that activity in the United States?
Ms. SCHNEIDER. Of the operators that are out there, they each take into account, from their legal counsel, who'll they'll take play from. Yes, we do have some that won't take any play from the U.S. We have some that take play from the U.S. We have some that take play from the U.S. States that have passed explicit laws that prohibit internet gambling, so it's a company-by-company decision in terms of how they handle that.
Mr. GOODLATTE. Whether or not they break the law?
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Ms. SCHNEIDER. Sir, with all due respect, if the law was that clear, and there is case law that says otherwise in some of the jurisdictions, I don't think we would be here having these discussions if it was that crystal clear. It's clearly an area that's still in need of clarification.
Mr. GOODLATTE. Let me ask you this. Would your organization exclude from membership those organizations who violated the law if there were a new law that was passed that said very clearly that you cannot engage in this activity on the internet with those who are placing these bets from the United States?
Ms. SCHNEIDER. That's a process that we would have to go through in terms of making that kind of clarification. Again, these are international companies that are operating, you know, for all the talk about it's an unregulated environment, I have a feeling that your colleagues in some States in Australia would take umbrage at that, because it is a highly regulated jurisdiction there.
So you get into those kind of multi-jurisdictional concerns that I addressed before. That's the biggest challenge with this. And I think we have to be forthcoming.
Mr. GOODLATTE. The law is very clear in the United States, one of the two parties to it. It's against the law in the United States. That is the issue that concerns Ms. Kyle sitting next to you, your member organizations are without paying any U.S. taxes, without complying with any kind of regulatory scheme, as the gentleman from New Jersey Gaming Commission testified, in violation of the laws of the United States as they exist right now.
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We do need to beef up those laws. We do need to make them even clearer than they are now. We do need to give law enforcement new remedies to deal with the problem.
But the fact of the matter is whether there are different laws in other countries, or around the world, the law in the United States is that you can't do this. Nonetheless, organizations that are members of your trade association are engaged in that activity.
Let me ask Mr. MacCarthy a question.
When you have folks who fraudulently or falsely code their credit card information, what do you do when you find one that's brought to your attention?
Mr. MACCARTHY. We have a general rule that our merchants must properly code the transactions.
Mr. GOODLATTE. If a merchant doesn't properly code, what do you do?
Mr. MACCARTHY. If it's brought to our attention, we have a process whereby we investigate, we tell the bank that works directly with the merchant about the problem, and we instruct that bank to take steps to correct it, to instruct the merchant in the process of correctly coding. If that doesn't work, then there's a process of fines. And if the infraction persists over an indefinite period of time—the exact number of months is not prescribed—then we have the capacity to separate that merchant from the system.
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Mr. GOODLATTE. Wouldn't you have the same capacity to do that for merchants who engaged in the activity I just described with relation to members of Ms. Schneider's organization and others that are offering these services that are doing so illegally in the United States?
Mr. MACCARTHY. If the circumstance you are describing is an offshore internet gambling merchant who improperly codes his transactions, does not use the code for gaming, does not use the code for electronic commerce, and puts transactions into our system that potentially put our issuers at risk for business expenses and for legal expenses and other risks, we would take steps to try to make sure that that merchant properly coded and put the transactions into our system in a fashion that allowed our member issuers to block those transactions if they so decided.
Mr. GOODLATTE. If Mr. Suarez, the Director of the Division of Gaming Enforcement in New Jersey, presented evidence to you that his investigators had found that a company in Antigua or any of a host of other countries around the world were offering gaming services in New Jersey, and they got under a hypothetical law, a law that I hope Mr. Leach will be able to pursue in the law in the near future, but if they were to bring you a court order that said that they were engaged in that activity in New Jersey or Virginia or any other of the 50 States that banned this activity or just under Federal law, you would be able to take steps to cut them off from the use of Visa cards.
Mr. MACCARTHY. Let me go back and reconstruct the example, if I may. If it's an internet gambling operation and it's actually operating in New Jersey or in Virginia.
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Mr. GOODLATTE. Let's say it's in Antigua and the bettor is in New Jersey. Suarez, as an investigator, happens to be doing an undercover operation.
Mr. MACCARTHY. Let's start with a U.S. example. If that were the case, because operating an internet gambling operation in New Jersey or Virginia, or in almost all the States except perhaps Nevada, since that is illegal, we would take steps immediately working through the merchant's bank to cut that internet gambling merchant off from our payment system and we would inform law enforcement officers right away. We do that under current law. We work very cooperatively with law enforcement people in that area.
And the other circumstance that you described, where law enforcement officials or any other people brought to our attention the fact that a particular offshore internet gambling merchant was improperly coding the transactions and expressed the view that that was contrary to U.S. law, we would work cooperatively with the law enforcement entity. We would immediately instruct the merchant bank to take steps to ensure that that internet gambling merchant properly coded the transactions.
Mr. GOODLATTE. In other words, what we are attempting to accomplish could be accomplished.
Mr. MACCARTHY. If the internet gambling merchant then continued to insert into the stream of transactions all and only properly coded transactions, then we would accomplish the objective of giving our people the capacity to block those kind of transactions if they so choose. That's under current law.
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If the internet gambling operation decided, instead of cooperation with us and law enforcement entities, decided that they would simply stop processing transactions in any fashion and vanished entirely from our system, we would have no way of knowing where they might resurface, and so it would be very difficult to follow them.
But insofar as they maintain the contact with our acquiring merchant, we would be able to work with them to make sure that they properly coded.
Mr. GOODLATTE. I assume these organizations have a desire to live off of the trade name they develop and therefore to just disappear and resurface poses some problems for them, especially if they're going to continue to use a legitimate means of collecting funds like Visa or another legitimate business institution.
Thank you, Mr. Chairman. I've abused my amount of time here.
Mr. LEACH. Thank you very much, Mr. Goodlatte. We are all very appreciative of what you've been attempting to do.
We do have a problem with votes on the floor. This is a very complicated day and very complicated legislation. In fact, it's so complicated, we are apparently tied up in process knots.
But I want to thank this panel very much. Let me say, procedurally, that all of your full statements will be placed in the record without objection.
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Without objection, Members will have 30 days to submit written questions and responses if that's possible from the panels.
I just personally would like to say we would also be very appreciative of any precision and recommendations of changes to legislation that may be offered by Members of the subcommittee that you become aware of.
Certainly, approaches of Mr. Goodlatte, I hope that you feel free to talk with Bob about and those pieces of legislation that may be offered in this panel, most particularly HR 556, but I think there may be others as well.
With that, let me say we are very appreciative of your coming before us and we thank you for your time and your effort and we hope it will continue.
Thank you very much. The hearing is adjourned.
[Whereupon, at 5:20 p.m., the hearing was adjourned.]