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TUESDAY, JULY 24, 2001
U.S. House of Representatives,
Subcommittee on Financial Institutions and Consumer Credit,
Committee on Financial Services,
Washington, DC.

    The subcommittee met, pursuant to call, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. Spencer Bachus, [chairman of the subcommittee], presiding.

    Present: Chairman Bachus; Representatives Kelly, Ryun, Manzullo, Biggert, Grucci, Capito, Rogers, Tiberi, Waters, C. Maloney of New York, Sherman, Moore, Hooley, Hinojosa, Ken Lucas, Shows, Oxley, LaFalce and Goodlatte.

    Chairman BACHUS. The Subcommittee on Financial Institutions and Consumer Credit will come to order. Without objection, all Members' opening statements will be made a part of the record. In order to permit us to hear from our witnesses and engage in a meaningful question-and-answer session, I'm encouraging all Members to submit their statements for the record. And in that regard, since we have three Members of Congress, I'm going to submit my statement for the record, which will save additional time.

    I think it is our custom to allow Members of the Senate to go first. Senator Kyl was a distinguished Member of this body. I'll recognize Mr. LaFalce for an opening statement. I'm sorry. Mr. LaFalce, why don't you go ahead?
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    Mr. LAFALCE. Thank you very much, Mr. Chairman. I've been interested in this issue for a long time. As some of you might recall when I was Chairman of the Small Business Committee, I conducted a number of hearings on the impact of gambling on the small business communities, and I introduced the first bill in 1994 to create a national commission to study the impact of gambling. My chief co-sponsor was Congressman Frank Wolf.

    In the next Congress, when the Republicans took a Majority in 1995, Congressman Wolf took that bill and introduced it and I was the chief co-sponsor. And with the help of a good many groups such as the Christian Coalition, we got that enacted into law.

    They rendered a report in 1999. That report called for a number of things. I have introduced two bills dealing with two of the recommendations of that commission report, both of which have exclusive jurisdiction within our Financial Services Committee, Mr. Chairman. One deals with the issue of credit cards, ATMs, debit cards, and the proximity of those machines to the gambling table itself. The commission says there should be a separation to mitigate the problems of compulsive gambling with the location of those electronic funds transfer machines from the gambling tables themselves. That's not to say they couldn't be other places within the casino, but not at the tables themselves.

    The second issue deals with internet gambling. I am not aware of any study which shows any socially redeeming value to internet gambling. You can argue there's some value to casino gambling. It's tough to say that there is much value other than to the person who is making the money off of internet gambling.

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    And there's been an explosion of internet gambling sites in recent years. This has made opportunities for high-stakes betting more widely available than ever before. As a result, more people are falling into serious debt because of gambling, and larger numbers of people facing the risk of gambling addiction. And young people are particularly vulnerable to its pitfalls. Because young people are experienced with—they're comfortable with the internet. And young people today have a plethora of credit cards: their own, their parents, and so forth. And they are increasingly lured to internet gambling. And they do this wherever they are. They do it in their dormitory room. And so the dormitory room becomes a virtual casino.

    But they also have Palm Pilots. They have wireless internets. And so they don't have to be wired now. They can go virtually anyplace in the world, on a beach, and that becomes a virtual casino.

    It is a huge problem, and Congress must address both those issues, not just the internet gambling, but the use of electronic funds transfer machines at the tables themselves. How do we deal with it? To me, and I think to a number of others, the answer is relatively simple: We cut off internet gambling at its source by prohibiting the primary payment vehicles that make online betting possible.

    Now Mr. Leach and I introduced a bill last year. Mr. Goodlatte introduced a bill. There was an amendment during a markup that was accepted when I was not present, when I was on the floor voting, and then the bill was reported out. As the amendment passed and the bill was reported out before I got back from the vote, that, in my opinion, may well have undercut and reversed the effect of the bill.

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    And so we have to be very careful of the law of unintended consequences here. We ought not to pass a bill that proposes to prohibit payments only to unlawful internet gambling operations, because I'm very fearful that if one State makes it lawful, or one foreign jurisdiction makes it lawful, then you could have internet gambling worldwide on the basis of that site, and this proposed legislation would have virtually no effect. It would have the opposite effect. It would legally sanction it.

    And so I think we need legislation dealing with this issue as the commission recommended, but I think it's legislation that we have to draft rather than the proponents of internet gambling. I thank the Chair.

    Chairman BACHUS. I thank Mr. LaFalce. What we're attempting to do is go ahead and let the three Members here give their testimony.

    Mr. SHERMAN. If I could just have 20 seconds, Mr. Chairman, I would just say——

    Chairman BACHUS. Let me go ahead and make a brief opening statement, then I'll yield to him, and then, I want to commend Mr. LaFalce. I also want to commend Senator Kyl, who introduced a bill that passed unanimously in the Senate. I guess that was last year, is that right? Mr. Leach and Mr. Goodlatte. They've all worked to tackle a very complex problem. And hopefully we can build some consensus working with the Judiciary Committee on how to address the situation.

    I'll yield to the gentleman.
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    Mr. SHERMAN. Mr. Chairman, I commend you for holding these hearings. I commend the panelists for being before us. I associate myself with the Ranking Member's statements and simply say that we've had a tradition in this country that if you want to lose your house, you at least have to leave your house. And we ought to continue that tradition by making it impossible to gamble from your living room with the same ease that you turn on your television. Thank you.

    Chairman BACHUS. Thank you.

    At this time we're going to hear from our first panel. We have a panel of private experts who will be on our second panel. At this time we will start with Senator Kyl, and then if it's all right, we'll go to Mr. Leach and Mr. Goodlatte.


    Senator KYL. Thank you. Mr. Chairman, thank you very much, and thanks to Chairman Oxley. I commend my colleagues, Representative Leach and Goodlatte, for their efforts in this matter as well. I feel like just saying amen to what's been said already, because the two critical points have been made.

    There is a huge need here that is growing in proportion every year. And second, because of the amount of money involved, all of the various gambling interests—and I have a rather broad blanket to describe those interests—are very clever about the way that they can insert in the language of the bill little exceptions or definitions that have the effect of precluding what we're trying to do here, and that's what we need to be careful of.
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    Just a little bit of flesh on the bones here. The growth in the number of sites. In December 1995 when I first introduced the bill to ban internet gambling, we had a problem, because there were about two dozen internet gambling websites already operating. Now there are more than 1,200 such sites according to Bear Stearns. The cost of wagering has increased significantly. It is estimated to total $1.5 billion last year and to go to a total of about $5 billion in just a couple of years, again according to Bear Stearns.

    With regard to the addiction problem that was mentioned by Representative LaFalce, Dr. Howard Schaffer of the Harvard Medical School's Division of Addictive Studies likened the internet to, and I'm quoting here: ''new delivery forms for addictive narcotics.'' He said: ''As smoking crack cocaine changed the cocaine experience, I think electronics is going to change the way gambling is experienced.'' And that is especially true, Mr. Chairman, Members of the subcommittee, with regard to youth, who are particularly at risk.

    We have quite a bit of testimony and evidence to that effect, especially college students, who have literally lost thousands of dollars gambling on the internet. The payouts are significantly unfair. We know that this kind of activity leads to further crime. In fact, up to 90 percent of pathological gamblers commit crimes to pay off their wagering debts according to testimony that we had before my subcommittee. And the FBI has noted that organized crime groups are heavily involved in internet gambling.

    Let me repeat that: Organized crime groups are heavily involved in internet gambling according to the Racketeering Records Analysis Unit of the FBI.

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    Moreover, internet gambling is used to facilitate money laundering. Again, testimony that we have received. These are some of the reasons why the National Gambling Impact Commission recommended that we enact legislation to prohibit internet gambling. It's both a national and a Federal problem. Not all national problems are Federal. But in this case, the attorneys general national organization, State attorneys general, came to our subcommittee in the Senate and said we cannot protect our citizens from internet gambling notwithstanding the fact that we have State laws to do it.

    And therefore, the entire organization headed by Jim Doyle, the Democratic attorney general from Wisconsin, who has testified before our subcommittee at least twice I know, testified that the National Association of Attorneys General, he says, ''took a step many of us never imagined.'' I'm quoting him now: ''The organization recommended an expansion of the Federal Government's traditional law enforcement role. Specifically, we urged the Federal Government to enact legislation to prohibit gambling on the internet.'' End of quotation.

    Now, for the State attorneys general to come to Washington to say we need your help, because the internet knows no State boundaries—it can go anywhere—I think is a huge step and should tell us what we need to do to help our States out.

    I am very supportive of the efforts of both Representative Leach and Goodlatte. They come at the problem in two somewhat different ways. But I think that by the end of the effort, we're going to find out which one of the enforcement mechanisms is going to work the best or perhaps whether they can even be combined in some way to ensure that there is an ability to enforce the prohibition against internet gambling.

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    In conclusion, I would urge those who think that they are going to be able to get away with internet gambling because the legislation was defeated last year to be very careful in their thinking here. And I hope we drive down the value of the stocks that support this kind of activity with what I'm going to say here.

    First of all, remember, the Federal Wire Act remains in force. It is still illegal to engage in sports gambling by telephone or wire, and that's going to catch a very broad group of activity.

    Second, the State laws still remain in force even though they are difficult to enforce.

    And third, we're going to pass legislation in this Congress that's going to broaden the blanket of coverage here and make internet gambling illegal. I am convinced of that. Our bill passed, Mr. Chairman, unanimously, right at the end of 1999. It was in the last session of the Congress. And I think we can do it again in the Senate, but I think it's a good idea to have our House colleagues go first to see what will work here in the House of Representatives so that we can then take it over to the Senate. That's kind of the strategy that I am pursuing with my colleagues here. And with your support, I think we can accomplish that goal.

    I thank you very much for holding this hearing. I hope that this will help to generate the momentum for legislation to be adopted this year.

    Chairman BACHUS. I appreciate that.

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    Mr. Leach, who was formerly Chairman of the full Banking Committee, we welcome you back and look forward to hearing your testimony.


    Mr. LEACH. Thank you, Mr. Chairman. Your holding of this hearing is very appreciated, and your leadership on all issues is much in my admiration.

    I'm pleased to join you and Representative LaFalce, and obviously Bob Goodlatte and Senator Kyl, who have led these efforts in the House and the Senate.

    Mr. LAFALCE. Jim, I'm having a lot of difficulty hearing you. Could you please speak up a bit more?

    Mr. LEACH. It's my mother's fault, John.


    Mr. LEACH. In any regard, there are a number of approaches to this issue, and one that John LaFalce and I worked on last year relates to an enforcement mechanism. Senator Kyl and Congressman Goodlatte have more comprehensive bills in general, and I am supportive of them, although I haven't seen Bob's bill this session. But I'm confident it will be a first class effort.

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    The approach that comes before the Banking Committee, however, relates to a technique of enforcement which is a preclusion of the use of bank instruments for settling debts that relate to internet gambling. In my view, it is the most effective enforcement mechanism that we can consider as an approach and is a very critical one. It becomes a better and stronger approach if combined with more comprehensive preclusions as are envisioned by Congressman Goodlatte and Senator Kyl. But as a stand-alone approach, it is also helpful, in fact, quite positive. And so the approach that Jon and I have crafted, to a similar, although slightly more comprehensive extent, that comes before the jurisdiction of this subcommittee, can work alone, and it would provide a new tool for law enforcement based on current law. It becomes even better if it's tied to an approach of Mr. Goodlatte or Senator Kyl that becomes even more preclusive.

    But I would simply stress that the enforcement mechanism approach that is under the jurisdiction of this subcommittee is, I think, the best approach at this time. I have frankly been a little disconcerted that there's been some indifference to date, and in fact, anxiety, within the financial industry and the credit card provider industry, about approaches of this nature, and surprising indifference among regulators to date.

    But I believe the internet gambling problem is one of those mushrooming kinds of social and economic phenomenons that people avoid at real risk to the economy and at real risk to aspects of the financial community.

    And so let me just conclude by saying that everyone has the statistics in mind of what's happening in growth. And, for example, it looks like over the next 3 years, internet gambling is likely to increase at least threefold, and some predictions are now more than that. It looks as if the social effects are rather astonishing that relate not only to bankruptcy—for example, a quarter of the people in my State of Iowa that are in gambling assistance programs have declared bankruptcy, where the effects on the family and the community are very large—and the social effects for those that don't participate can be very large as well, in terms of higher interest rates and defaults.
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    It isn't simply a gambler's concern, it's also a non-gambler's concern as well. And I would only conclude then by noting that there are many approaches to this issue. But enforcement is the key one. One can come up with all sorts of concerns about what is happening, but unless there is an enforcement mechanism, we cannot get at the issue. And it ends up that the financial community has the only enforcement tool I know of that's credible. It does involve a new burden on the industry, although I think it's a very slight burden relative to the protections that would be created in terms of protections against losses that would otherwise exist.

    And so I would hope this would be one of these issues that the American public can come together on, and which the financial community can come to embrace, and which regulators can come to endorse. And if we don't move in the very near future, the hand-wringing and social cost in subsequent Congresses will be just sensational.

    So this is the time to act, and I'm hopeful we will. We've passed this particular approach that applies to the Banking Committee in the last Congress. Unfortunately, it wasn't allowed to be voted on in the House floor. I would be hopeful it would be in this Congress. I thank you very much, sir.

    Chairman BACHUS. Thank you.

    Representative Goodlatte from Virginia. And we commend you on your work on this and many other issues.

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    Mr. GOODLATTE. Thank you, Mr. Chairman, and I very much appreciate the opportunity to testify today and thank you for your leadership on this issue and your subcommittee. I also want to thank Congresswoman Kelly for the excellent hearing that was held in her subcommittee just a couple of weeks ago, and Congressman LaFalce who has been a leader on this issue for some time.

    It's my pleasure to be here today with Senator Kyl and Congressman Leach, both of whom have shown some tremendous initiative on this issue. Senator Kyl has passed this bill through the Senate unanimously twice in two Congresses. We've come close in the House. In the last Congress we got 61 percent under suspension of the rules, so I am confident that we will have the opportunity to bring up this legislation again this year and that we will pass it.

    This year it's my hope that it will include the efforts of Congressman Leach, who I think has, along with Congressman LaFalce, come up with one of the most effective methods of enforcement.

    I have a written statement for the record, but what I'd like to do is point out the nature of this problem. The Wire Act, which is our principal Federal law in this area, was written in 1961. Obviously, not in contemplation of a whole host of different telecommunications measures, but certainly not the internet. It was designed to address the problem of people placing bets, primarily sports bets, by telephone across State lines and has been an effective tool in enforcing the law in that area. But the Wire Act is out of date with the advent of the internet.

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    For one thing, there is a question about the application of that law to internet gambling. Does that law cover this form of technology? Does that law cover other forms of gambling that are not contemplated by it? For example, casino gambling. You couldn't effectively have casino gambling over the telephone in 1961, but you can very effectively have it today.

    The law has worked in many jurisdictions. That's why the overwhelming majority of these sites are offshore in the Caribbean islands and in other parts of the world, and that's why we need to update the law to address it. That's why Congressman Leach's solution of imposing a ban on the use of various financial instruments in order to engage in illegal gambling is so vitally important to the solution to this problem. That, coupled with an updating of the law to make sure that modern forms of communications are covered, is the key to this.

    Internet gambling is something that is sucking billions of dollars out of the country. It's unregulated, untaxed, illegal and offshore, and we need legislation to address that. The problem has been pretty effectively dealt with in this country, but we need to find ways to give law enforcement the tools to combat these offshore folks, and that's what the legislation that I will introduce shortly will address.

    Internet gambling is a concern to everybody. I am strongly anti-gambling. I would ban forms of gambling that are legal in my State of Virginia, such as the State lottery. However, there are regulated by the States many forms of legal gambling in the United States, and virtually every one of those industries is also being affected by this illegal, offshore, unregulated effort to promote gambling outside of the jurisdiction of American laws, so that the State lotteries are suffering a loss of revenue. Casinos in Atlantic City and Las Vegas and other communities around the country—they're also facing an untaxed, unregulated form of competition.
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    So if we focus our efforts here, I would love to focus them on addressing all forms of gambling. But if we focus our efforts on giving the States and the Federal Government the authority to challenge these illegal, untaxed, unregulated gambling sites, I think we have the prospect of having the kind of support in the House that we had in the Senate.

    I note that obviously, the two Senators from Nevada were supportive of Senator Kyl's efforts. Again, I have concerns about gambling, but I think we need to focus on the immediate threat, which is this unbelievable growth in gambling on the internet and give law enforcement the tools that they need to combat that. We've been working with the Justice Department and with other law enforcement entities, the National Association of Attorneys General, to formulate this legislation, and I look forward to moving it with the help of this subcommittee.

    Chairman BACHUS. Thank you.

    I appreciate your testimony. Mr. Goodlatte mentioned, and I think others have mentioned, that Mrs. Kelly held some extensive hearings on this earlier this month. If you read that testimony, I think, if for no other reason, you see the social and the financial hazards that young people have when they are exposed to internet gambling. They are computer-sophisticated. They normally have access to a credit card. They become addicted at a young age to this form of gambling. And if for no other reason, I think we need to address it. And it is a tremendously growing problem with our young people who become addicted to gambling at such an early age.

    So I for one have no equivocation about whether we should pass legislation.
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    Mr. LEACH. Mr. Chairman, might I make just one final comment based upon what Representative Goodlatte said and what you just noted? It's hard for a child to become addicted to gambling at the horse tracks or at the casino. But as you point out, it's very easy, and as the experts say, it's easy to click the mouse and bet the house at home.

    And that's one of the reasons why we distinguish between this form of gambling and those regulated types of gambling. I agree with Representative Goodlatte. If I could, I'd do away with all gambling. But that is not our effort here. And to clear up a misunderstanding, we were actually accused of trying to protect other forms of gambling because we drew the line at legal, regulated gambling and said we're not going to do anything about that. But this far, and no further. That was our bill. It didn't protect anybody. It didn't advance the interests of State lotteries or horse racing or anything else. But it was misrepresented as having done that.

    So to be crystal clear, I think all of us here and many others have said we're not going to do anything about the existing gambling. We're not going to cut it back. We're not going to allow it—at least we're not going to do anything to cause it to increase. But we're just going to draw a line and say with respect to internet gambling, it isn't going to be legal here in the United States of America.

    So I hope that that's clear to everybody. Our bill doesn't have anything to do with any other form of gambling. And to the extent that there are definitions in the law that relate to them, it is simply to be clear that our bill isn't intending to either advance or subtract from what they already do. Thank you.
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    Chairman BACHUS. I appreciate that. The other thing which I think was hit on is that our teenagers love sports. They follow sports intently. They have a computer sophistication. And when they're offered the opportunity to bet on their favorite sport online, they're doing it in increasing numbers and at an increasingly early age. And it is a tremendous problem that faces this country.

    I do want to ask one question. The Federal Wire Act, Mr. Goodlatte, you mentioned when it was passed, obviously it couldn't have anticipated the internet. There has been a decision down in Louisiana now that it may not apply to internet gambling. Does it apply? Should we also, as part of our efforts, should we amend the Federal Wire Act? Do you believe the current law prohibits internet gambling already?

    Mr. GOODLATTE. I don't believe I would reach the same conclusion that the trial court judge did in Louisiana. I believe that the Wire Act can be read to cover more types of activity and can be read to cover internet-type activity.

    However, because of that kind of uncertainty and because the Wire Act clearly did not contemplate changes in technology and any ambiguities need to be addressed, we need to have a new law that effectively updates and modernizes the Wire Act.

    The problem from my perspective is that you can't have the incentive for law enforcement to take an aggressive stance about this if they don't know when they go into court whether the court is going to respond favorably or whether what they're trying to do is even covered by the law that they're operating under. So we definitely need a modern law that addresses changes in technology.
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    Chairman BACHUS. Yes. I think that Louisiana decision, we certainly hope it's not a precursor to some other decisions. And it ought to give us some more incentive to address this issue. I'm going to yield to Mr. LaFalce for questions and then to the Chairman of the full Committee, Mr. Oxley.

    Mr. LAFALCE. Thank you very much, Mr. Chairman. And Mr. Chairman, let me tell you how pleased I am at the statements that you have made, because I know we have a similar heart and similar mind on this issue, and I know with your outstanding legal expertise, we will make sure that what we intend is what's enacted into law, not what others might intend.

    Let me distinguish a number of things now. This is very important. There's Leach I. That was the bill that I co-sponsored in the last Congress. There is now Leach II and my bill. And Leach II basically is the product that was reported out of last year's House Banking Committee as amended by Congressman John Sweeney. We had a few things intervening between then and now, too. We had the Louisiana decision interpreting the Wire Act. And U.S. District Judge Stanwood R. Duval, Jr. dismissed the lawsuit in March of 2001 saying that the pending legislation on internet gambling—that's our legislation—quote: ''Reinforces the Court's determination that internet gambling on a game of chance is not prohibited conduct,'' under the Wire Act.

    We also have another phenomenon that's happened, too. There has been a change within the thinking of the Nevada gambling establishment. About half of them are now becoming sponsors themselves of internet gambling. And that changes the political dynamic, and we ought to be aware of that as we proceed.
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    The difficulty I have, if you take the bill that Leach, LaFalce and I this Congress, it is entitled ''Internet Gambling Payments Prohibition Act.'' Same title as last year. If you take the title of this year's bill, it's the ''Unlawful Internet Gambling Funding Prohibition Act.'' So the question is, what's unlawful? And there you run into a real dilemma. If something is not unlawful under the Wire Act, or if it's lawful in just one jurisdiction, you run the risk—or if there's just a void. If the law doesn't address the issue, it can't be deemed to be unlawful. You would have to have a specific prohibition.

    Now, I know there is language saying whether it initiates or where it's received, and so forth. But, if I'm a credit card company, how am I going to know what the law is in every single jurisdiction along the way? And it seems to me that we've created an enforcement impossibility, and we've created an opportunity to just drive trucks through such a law.

    It's unnecessary, I believe. Now I know that the intent was to accommodate some existing interests such as horse wagering, and so forth. And therefore, the total prohibition was thought to be perhaps too draconian. Maybe so. And maybe we can tailor it. But if I had to choose between being too draconian and too loose, that's an easy one for me. At least let's start off as too draconian. And that's very important, Mr. Chairman, where you start off.

    If you start off with a prohibition, that's one thing. If you start out with something that says it's got to be unlawful, then you're making your lot in life an awful lot more difficult. I hope you'll start off basically where we started off in committee in the last Congress.

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    Any comments, anybody?

    Mr. LEACH. Let me respond briefly, John. I was here for the debate and voted against the amendment that weakened the bill, but it was the will of the committee to move in a fractionally looser direction, partly because of the horse racing phenomenon. I would prefer the stronger prohibition. And if we can get consensus to that degree, that's my strong preference.

    Mr. LAFALCE. I think that was a voice vote, Jim.

    Mr. LEACH. No, no, sir.

    Mr. LAFALCE. On the amendment and on the final passage.

    Mr. LEACH. Well, I don't know the final passage, but we had a strong vote, and it was an unhappy vote from my perspective. But I am simply laying it as a marker where the committee was last year.

    Now having said that, there are reasons to go in that direction, there are reasons against it. I would prefer the stronger preclusions. Mr. Goodlatte, I know, has a possibly different perspective.

    Mr. GOODLATTE. Well, the only thing I would add is that I think this points up the importance of these two efforts moving in tandem. I don't know what the will of the Financial Services Committee will be on this question. I favor greater restrictions on the use of financial instruments in gambling.
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    However, it is clear that the gentleman from New York raises a very valid point. And that is that if it's not clear what is legal and what is illegal, then we certainly must define what is illegal. That is the jurisdiction of the Judiciary Committee, and so that's why we have to have these bills or one bill working in tandem and a great deal of cooperation between these two committees as we move forward so that we are very clear about what we are attempting to accomplish and the means by which we get there, which is to make it clear that gambling on the internet is illegal, so that no matter how you resolve that issue this time, whatever you do accomplish does have meaning.

    Mr. LAFALCE. That would mean we'd have to preempt a State law like Nevada, which is specifically making it legal, as I understand. I'm not sure of the status of that. Does anybody know the exact status of that? Does my counsel know?

    I guess it gives the State gambling commission—I'd like to introduce legislation that wherever the word ''gaming'' exists, change it to ''gambling,'' you know, to authorize internet gambling.

    Chairman BACHUS. All right. I think the time has expired.

    Senator KYL. Mr. Chairman, I was just going to say that Representative LaFalce is correct about the status of the Nevada law as I understand it. And this illustrates a problem. If we, those of us who agree that we should ban internet gambling, can simply agree on the basic premise, which is we're going to leave these other existing legal forms of gambling alone, but not permit them to move into internet gambling, which they're not doing now, to basically codify the status quo, but not permit it to go any further, then we all agree on the goal.
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    The problem is that these various interests have very clever lawyers and lobbyists, and they're skilled at playing us off against one another and of creating definitions which advantage their particular group, whether it's the lottery or the horse racing or whatever. I have supported each of the drafting definitions which make it clear that the status quo is protected, but that they can't get into internet gambling.

    Now if we could just all commit to do exactly that, then they're protected. They continue to get to do exactly what they're doing, but they don't get to move into internet gambling, which would be prohibited. The Nevada experience illustrates the fact that we've got to move quickly. Because here you have a State that has now moved into legal State internet gambling of a sort. It's supposed to be highly regulated. But there's a real question about whether they can create the technology which will permit them to enforce this in a way that doesn't permit the kinds of abuses that we're all concerned about. And that really speaks to the need to act on this and to act on it quickly.

    Chairman BACHUS. Thank you.

    Next I'm going to recognize the Chairman of the full Committee for not only a statement, but also for questions. And we went over, Mr. LaFalce went over, so I would allow you to do the same. I would like to say just one thing.

    The hearing that Chairwoman Kelly held pretty much calls into question whether we even can regulate; whether regulating internet gambling is a viable alternative. I'm not sure, and I'm beginning to believe that we either ban it or do nothing at all. Because I'm not sure the technology allows us to regulate it. And certainly the financial institutions we have heard from said that was problematic. So a much plainer solution would be a ban.
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    Chairman Oxley.

    Mr. OXLEY. Thank you, Mr. Chairman, and thank you for recognizing me. And I would make my opening statement a part of the record and spare everyone a lengthy opening statement and welcome our distinguished panel, our old friend and former colleague, Senator Kyl, Bob Goodlatte, who has done yeoman work in this area for a number of years, and our colleague on the subcommittee, former Chairman Jim Leach, for all of the good work that you have done.

    The discussion that you had just prior to my questions, brought up an issue not only that deals with legal gambling now that takes place in Nevada—which we all agree is the case—I'm wondering about the proliferation of gambling with Indian casinos, riverboat gambling that takes place in States like Iowa and Ohio, and some of those other rather conservative bastions of areas that normally aren't considered to be dens of gambling.

    And so it appears to me, and I would like to hear from the panel, as to whether we are just dealing with the Nevada situation or the potential for many other casinos that exist throughout the country. Let me just begin with Senator Kyl.

    Senator KYL. Thank you, Chairman Oxley. Our effort is not to deal with existing casinos, riverboat, Indian gambling or any of these things in any way. In other words, what's legal today would continue to be legal, but they can't get into internet gambling. That's all. We just draw the line for them just the same as everybody else. Everybody would be treated the same.
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    Mr. OXLEY. Do you agree with that, Mr. Goodlatte?

    Mr. GOODLATTE. I do, Mr. Chairman. My sentiment would be to try to address that concern, but I don't know that we would have the kind of legislative success we need if we took on the entire problem of gambling in one fell swoop. Gembling has traditionally been illegal unless regulated by the States. And to confront those State decisions to allow it in the myriad forms that you described, I think is perhaps a challenge beyond the scope of this bill.

    We are trying to stop gambling from expanding on the internet. Those same entities could not only offer what they're doing on the riverboat, but have a computer on the riverboat that offers it across the country, and we want to stop that.

    Mr. OXLEY. And let me ask you, have you introduced your bill yet?

    Mr. GOODLATTE. I have not introduced it yet, Mr. Chairman. We've been working with a number of groups—and most especially the Justice Department—to come up with legislation that we think we can move forward with.

    Mr. OXLEY. But the concept you talked about, and that is recognizing the legality of the current gambling situation, only saying that they can't get into internet gambling, would be inherent in your bill?

    Mr. GOODLATTE. Yes. We don't recognize them. We simply say that we are not attempting to roll back existing legal forms of gambling regulated by the States.
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    Mr. OXLEY. Thank you.

    Mr. Leach.

    Mr. LEACH. Well, I'm doubtful of all forms of gambling. In fact, if I had my druthers, I'd abolish State lotteries. But I don't. This is a very narrowly crafted approach that only gets to internet gambling and then recognizes that whatever one's personal views are, there are forms of gambling that are legal in States, whether they be horse racing or casinos. And this does not basically challenge that legality. It only goes to the internet.

    Mr. OXLEY. I had read somewhere where the gambling casinos in Vegas had—and maybe you've addressed this before I came in—that there was some indication that they were considering moving into internet gambling. Senator, do you have any evidence that is the case?

    Senator KYL. Mr. Chairman, Chairman Oxley, there were news accounts that suggested the problem was more pervasive than I think it is. According to my colleague, John Ensign, who of course recently served in this body, he has done a sort of informal survey of the situation, and it is his view that there is mainly one casino that has decided to try to get into internet gambling. He's not currently aware of any others. But he shares my view that we had better get at this pretty quickly or more of them could decide to get into it.

    Mr. OXLEY. That was, in other words, kind of a race to the bottom, at least if you look at it that way. And clearly, when those trends start to develop, particularly if they're reasonably successful, you would expect that others in the industry would follow suit. And I guess that really is the issue. Whether, if we don't do anything legislatively, that indeed, you could see a huge proliferation of domestic-based internet gambling.
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    Senator KYL. Mr. Chairman and Chairman Oxley, it offers us a point to make another point. These casinos in Las Vegas spend billions of dollars to create wonderful palaces that attract people to come stay with them and gamble. That costs a lot of money, just like horse racing costs a lot of money. You know, horses eat a lot of hay. The thing about internet gambling is, it's really cheap to do. With just a few hundred dollars and a smart programmer, you can set up an internet site. And that's the competitive aspect that all of these other legal forms of gambling are afraid of.

    But what at least one casino in Las Vegas has concluded is, ''Look, we have a lot of money, we have a lot of technology available to us, and we have a site that attracts people anyway. So if this is not going to be made illegal, let's get in the action. And with our brand name, we can probably compete pretty well with all of those independent operators that have started up on the internet.'' So that's the reason why we've got to get at this and get at it now while those people are generally still supportive of banning this activity, before they decide that they want to get in on it too.

    Mr. OXLEY. Thank you. Mr. Chairman, thank you for your patience on this issue. And I want to again congratulate you and Mrs. Kelly for the hearings on this very important issue. And I think you can tell from the size of the group here and the attention it has received in the media, this is a very important issue that we're going to have to chew on. And again, we appreciate the leadership of the three gentlemen at the witness table, and I yield back.

    Chairman BACHUS. Ms. Hooley.

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    Ms. HOOLEY. Thank you, Mr. Chairman, for holding these hearings and for the panelists. I really appreciate you being here. I have a couple of questions just to clarify some things. Maybe some of you know that New Jersey is also looking at regulating internet gambling. Have you heard about that?

    [No response.]

    Ms. HOOLEY. OK. Well, whether it is or isn't, the question is, as you look at prohibiting internet gambling—and I agree it should be—what do you do with, if you say, OK, we're going to stop at this point unless it's regulated, unless the State allows it, or what's already there is fine, and then we're going to prohibit internet gambling from here on out. What would that do to Nevada? Are you talking about if there's a casino there already online and it is regulated by the State, is that going to be OK?

    Mr. GOODLATTE. Congresswoman Hooley, with regard to your first question, I think there has been discussion in the State of New Jersey about legalized internet gambling, but my understanding is that there has not been sufficient support in the legislature. That may be, in part, due to the fact that in New Jersey, Atlantic City is where they have sort of quarantined legal gambling. And so legislators from the rest of the State are concerned about the fact that if you allow it online, even if it's restricted to within the State of New Jersey, you're going to essentially spread that to everyone's living room across the entire State. So I don't expect to see the same movement there that occurred in Nevada.

    However, the issue is will legislation contain a provision that says the State can regulate within its boundaries? I don't believe the technology exists for them to do that, but that is certainly something we are struggling to address in our legislation. If we allow the States to regulate it, including internet gambling within the State, we have to be absolutely assured that it's not going to go beyond the boundaries of the State. The internet is international in nature. That's what the nature of this very problem is and why we have these hundreds of offshore sites that we're struggling to deal with, because they're all in people's living rooms right now.
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    How do you regulate it so that it is only within the State? We may leave that up to the States to figure out, with strict prohibitions on going beyond the boundaries, or we may attempt to have an across-the-board ban. But that is a very good question, and I think technology is going to provide the answer to it.

    Ms. HOOLEY. OK. Another question that maybe any one of you can answer, and that is, what's the rise in addiction? What's that been in the last couple of years? And can you relate that at all to the forms of gambling where people can do it very much in private, whether that's going to a tavern or a bar or a restaurant where they can go to a machine and no one sees them gamble versus what happens in a casino? Do we have any information about that?

    Mr. LEACH. Well, we have some statistics. A million people gamble on the internet daily, and what's impressive about that is that it isn't of a population of say almost 300 million, one person once a day, it's likely a lot of repeat people. And those people are defined as compulsive or addicted gamblers.

    And it's one of the misleading aspects of gambling. All of us, from one time or another, gamble. Let's say you sit down and play bridge for a tenth of a cent or whatever. It's a zero-sum game within that table. But with gambling on the internet, the odds are always stacked against you, whereas if you're in a zero-sum situation with friends or whatever, someone is going to win and someone is going to lose. But when you enter these games of chance in this particular way that we're talking about, the more you gamble, the more you are certain to lose.

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    And so, it's a real problem. If you've got a million a day, and the projections are it will triple in 3 years, that's three million a day. And I think you can triple that again quite rapidly. And so this is going to be a very major social phenomenon if the Congress does not act very rapidly. And I would only stress, too, that we're seeing in State after State not only bankruptcies rise, but it's a family issue in terms of what it does to the family. And frankly, it's a harm issue because of the instance of people that, a: abuse their kids; and b: abuse themselves based upon getting in huge gambling loss situations, is very high.

    Ms. HOOLEY. And how do we address the offshore gambling?

    Mr. LEACH. Well, it ends up that the only effective mechanism in dealing with the offshore, because these, by definition, are legal jurisdictions that we cannot put American law to change, except that if you preclude the payment mechanism. That is the one truly effective, or at least largely effective, tool to deal with offshore. Because the offshore gambling can continue to be legal. But on the internet, if you cannot pay, that will damage the offshore gambling very largely. And so it is the one thing that has a really serious impact on offshore gambling.

    Ms. HOOLEY. Thank you.

    Mr. GOODLATTE. I agree with Congressman Leach. I would add that we also need to beef up our laws so that when individuals offshore come into the United States, as has happened, we can effectively prosecute them. And in addition, there is the issue, the controversial issue, of blocking; whether we should require internet service providers to attempt to block these offshore sites from coming into the United States, a technologically difficult thing to do, but nonetheless, something we've also looked at.
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    Getting back to your first question, however, you may be familiar with a recent study of Oregon residents. This study showed—and we'll make this available to you—out of a total of 14 different types of gambling activities, internet gambling was the only one that saw an increase in participation among Oregon residents between 1997 and the year 2000. Internet gambling has increased from 1/10 of a percent in 1997 to 7/10 of a percent in 2000. And while internet gambling participation rates are still low, the 260 percent increase in lifetime internet gambling participation in Oregon corresponds to an estimated annual growth rate of approximately 54 percent. A sixfold increase, 600 percent in past year internet gambling participation in Oregon, corresponds to an estimated annual growth rate of more than 91 percent.

    So other forms of gambling are there. They're a problem. The same types of problems with crime and bankruptcy and addiction exist there, but they aren't growing out of control like internet gambling is.

    Ms. HOOLEY. Thanks to all three of the panelists for your commitment to this issue. I appreciate it.

    Thank you, Madam Chairwoman.

    Mrs. KELLY. [Presiding.] Thank you, Ms. Hooley.

    It apparently is my turn next. I'm going to say a couple of things. I, too, Senator Kyl, have spoken with John Ensign. He agrees with the need for speed. In my hearing it came out that there were a number of people that felt the same way. Gambling is a social problem.
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    Currently in New York State, the New York State Lottery states your possibility of winning is 1-in-18,946,000, right now. Now you probably have a better chance of being hit by lightning than winning the lottery. It's intermittent reinforcement. And that, psychologists tell us, is the strongest reinforcement in the world. That's why people become addicted to gambling.

    I lost a very good friend through gambling. Believe it or not, he started on the stock market and began playing penny ante bridge on the trains commuting. The next thing, he got deeper and deeper and deeper until he lost his wife and both of his children and he himself wound up on the streets.

    I think it's very important that we address the social concerns with regard to gambling. Senator Kyl, you said organized crime groups are heavily involved in internet gambling right now. My concern is, how do we enact some kind of legislation so that we don't drive internet gambling underground, and make it possible for an amplification, turn it into an underground business that's controlled by organized crime? Right now, sports are bet to the extent that the sport becomes secondary and the point spread is the most important thing.

    Do either of you have anything in your bills that addresses that problem? I'm talking about any of the three of you if you could answer.

    Senator KYL. Madam Chairwoman, the subcommittee I chair of the Judiciary Committee in the Senate has had numerous hearings on this. We've taken quite a bit of testimony, and it's ranged all the way from a former gambling commissioner in New Jersey, for example, who says this is the kind of thing that you just cannot regulate. It's very, very difficult to regulate. You've either got to ban it and then enforce that or let it go. And that's the conclusion I think several people have reached here.
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    The way that you do it is either through the blocking—and the technology does exist, but obviously the internet service providers don't want to do that if they don't have to—and the credit card and banking enforcement that Representative Leach has come up with here.

    If you say that it's illegal in the United States to engage in this conduct, and we have an aggressive enforcement mechanism through both the FBI and the banking regulators, then while organized crime may attempt to get into it, and they may control it offshore, we could make it very difficult for them to engage in the activity here in the United States. And remember, once we get personal jurisdiction over somebody here, we can put him in jail. We're not trying to do that with these offshore sites. They can do all they want to offshore. It's when they come into the United States with the activity that we can take action against them.

    So this is really an effort to begin to enforce something that is beginning to get out of hand and that law enforcement right now is not doing much about, because they don't know what to do about it. And the what to do about it is what we hope to supply with this legislation.

    Mrs. KELLY. Thank you very much. In the United States, regulation guarantees payment. That's another thing, a positive thing that regulation actually does.

    I'm wondering, I read Mr. McGuinn's testimony, and I think he proves in his testimony when he says Virginia has the highest per capita sale of tickets in the Hampton Roads area, but the lowest percentage of tickets in Fairfax County, I think he proves very well that gambling often hits the poorest people in the United States rather than those people who have a little extra money and want to respond by gambling.
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    Congressman Leach, there's one question I'd like to ask you. Some people have raised some concerns about your legislation saying that it would hurt privacy by forcing credit card companies to develop a system of locating where a customer is when they make a transaction. Would you be willing to respond to that, please?

    Mr. LEACH. Well, I don't know precisely what you mean. I don't know that criticism. I don't know the notion of knowing where the customer is. But certainly there is an implication that people should be very concerned on who the company that places someone in debt is. We're very careful that the credit card company only has to be knowing accountable. Because obviously, some things will develop and there will be an unknowing relationship.

    But, I think it's impressive that some banks now are starting to move on their own in this direction, and we're going to hear later today from Wachovia, a very principled American bank that is making some rules in its regard, presumably in its own self-interest, that seem to be common sense.

    And so this is something that all forms of information do involve privacy umbrages. We all understand that. And the question is, is there a reason for that from the credit card company's point of view or the bank's point of view, and obviously it isn't shared publicly, and so there isn't a public disclosure. But there might be a trivial privacy umbrage, but I can't visualize it being very significant.

    Mrs. KELLY. The concern, obviously, of even people like Wachovia is that there can be a subversion of whether or not this credit card is being used in a gambling institution or, if I understand it correctly, that number comes through as a merchant's number, and it looks as though it's a sale, not a gambling debt. And I think that's the question that goes to the question of privacy. But thank you very much.
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    Next we have Mr. Hinojosa.

    Mr. HINOJOSA. Thank you, Madam Chairwoman. This has been a very interesting discussion, and I would like to ask one question.

    What do you think should be the financial penalties and maximum prison sentences to those involved in this discussion that we're having? And I'm talking about the gambler, the credit card companies, including the banks, gambling institutions, underground participants, and finally, offshore entities? Bob, would you like to answer that?

    Mr. GOODLATTE. Mr. Hinojosa, with regard to the gamblers, we leave that to State law. In other words, the consumer that engages in this activity, we don't attempt to impose criminal fines or penalties on them because those engaging in it are located in a particular State. The State has jurisdiction over them. They can impose those.

    However, for those engaged in offering these illegal gambling services, the legislation that I introduced in the last Congress had 4 years. I believe it was the same with Senator Kyl, a maximum 4 years imprisonment. The Justice Department has been recommending 5 years. So we are again in discussion with them about whether it would be 4 years or 5 years, but something in that range is what we contemplate.

    Mr. HINOJOSA. Would you combine sentence and financial penalties?

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    Mr. GOODLATTE. Yes. There are also financial penalties involved.

    Mr. HINOJOSA. And what would they be?

    Mr. GOODLATTE. A person engaged in a gambling business who violates this section shall be fined an amount equal to or not more than the greater of the total amount that such person bet or wagered or placed, received or accepted in bets or wagers as a result of engaging in that business in violation of this section, or $20,000. Imprisonment not more than 4 years or both.

    Mr. HINOJOSA. How did you come up with $20,000?

    Mr. GOODLATTE. Twenty thousand dollars is basically a minimum amount here.

    Mr. HINOJOSA. Well, the minimum is $20,000, but it could be higher?

    Mr. GOODLATTE. Right. The greater of that or the calculation that is in the formula. In other words, we wanted something that was a threshold amount that would be a disincentive for somebody to engage in this activity, but it could be far greater than that, depending upon the magnitude of their offense.

    Mr. HINOJOSA. Fine. I understand. Now if he used the credit card and spent $100,000, then it could be as high as $100,000, but not less than $20,000. Is that what I heard you say?
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    Mr. GOODLATTE. It could be $100,000 or higher, depending upon the nature of their activity. Twenty thousand is a minimum.

    Mr. HINOJOSA. I think you've answered my question.

    Thank you, Madam Chairwoman.

    Mrs. KELLY. Thank you very much.

    Next we go to Mrs. Biggert.

    Mrs. BIGGERT. Thank you, Madam Chairwoman. We seem to be talking about college students using credit cards to gamble from their college dorm or from the house. But it seems to me that most college students have a pretty low limit on their credit cards. Is there another way that they can do this? If they're using their parents' card, it might be illegal. But how do they get so involved in this with the limits on credit cards?

    Senator KYL. Madam Chairwoman, we've had quite a bit of anecdotal testimony about college students. There doesn't seem to be a study that I'm aware of anyway. But in testimony by William Saum before this subcommittee on July 12th, I'll just quote one sentence. He talks about some of the specific cases he's aware of. He says: ''I've spoken with students who have lost thousands of dollars gambling 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 on sports over the internet.'' And he noted that prior to placing his first bet online, the student never wagered on any sporting event. And he goes on to say: ''Please be assured that this student's experience is not unique.''
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    Now I can't answer the question about how specifically they are able to get that much value on a credit card, or whether it's a combination of cards or they're using mom and dad's card, or what. I'm sure that all of those things are possible. But I will tell you that probably the biggest proponents of this legislation are the professional sports organizations like the NFL and the NBA and Major League baseball, as well as the NCAA, the amateur athletic association. And I have heard a lot of anecdotal evidence from both the professional and the amateur sports side of their fears, their great fear.

    There is a lot of money involved in professional sports, and they can't afford to have these sports adulterated by the possibility that the event is being fixed. And they're just scared to death that because of the rise of gambling on sports activities over the internet this is going to happen. So these professional sports organizations, in particular, have spent a lot of money trying to get this legislation through. I think that shows you the degree of concern that they have about it.

    Mr. LEACH. If I could add to that, Mrs. Biggert, college kids are the computer-literate generation. They're also intensely loyal to their new institutions. And it's becoming kind of the thing to do to bet for your school. And to simply add on to what John Kyl has just said, all of a sudden——

    Mrs. BIGGERT. Could you talk a little bit louder, please?

    Mr. LEACH. All of a sudden, all of the major college football and basketball coaches in America have become exceptionally alarmed on this issue, and I think for very good reason. This thing is exploding on college campuses.
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    There aren't good studies. There is a Los Angeles Times article that is really rather profound indicating a lot of anecdotal kinds of circumstances. But at this time, this is a subject that is so fast-changing that everything is anecdotes rather than deep study, and a study that was done 6 months ago is out of date. And that is the dilemma.

    Mrs. BIGGERT. Well, if things change so much with the credit cards, or whatever means that would be used to pay for these, won't someone come up with some way then to get around using a credit card, or the way that they electronically transfer money to pay for this to these offshore companies?

    Mr. LEACH. That's always possible, and that's why we're trying to write law as broadly as possible, giving lots of discretion to regulators on bank financial types of instruments with the idea those may develop in the future as well. And so we're trying to write legislation that is very expansive in terms of definitional approaches. And partly because of the problems that we've seen with the Wire Act definition, to make it clear that there are ways you can change definitions over time.

    Mrs. BIGGERT. And the credit card companies, if they make a mistake, they are liable under your bill?

    Mr. LEACH. They are not liable under the bill unless they knowingly do things or participate themselves. There is a great recognition that there will be a realm of the unknown.

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    Mrs. BIGGERT. Is that a due diligence standard?

    Mr. LEACH. I can't tell you that. I don't know.

    Mrs. BIGGERT. Thank you.

    Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you. Mr. Leach, I understand you have an amendment on the floor?

    Mr. LEACH. Yes, sir.

    Mrs. BIGGERT. So Mr. Ryun has a question.

    Mr. RYUN. I would actually like to yield my time to Mrs. Kelly.

    Chairman BACHUS. Mr. Leach, if you need to be excused, we can understand that.

    Mr. LEACH. Thank you.

    Mrs. KELLY. Mr. Leach, there's one more question I wanted to ask you, and that is about what in your bill would prevent someone from going into a place like Western Union, plunking down a lot of cash, and wiring it offshore in terms of betting? And the reason I'm asking this is you know as well as I do, that some of the internet gambling sites are being used for money laundering. This would be a neat way to money launder.
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    Mr. LEACH. Actually, there are many aspects of the internet gambling issue. Money laundering is one. Organized crime, as has been indicated, is another, not just the traditional Mafia. We have a Russian Mafia that's operating offshore that is of real alarm to law enforcement. But clearly, there are many ways you can settle transactions, but this would be intended to apply to a Western Union-type setting.

    Mrs. KELLY. The language in your bill would be intended to apply to that? Is that what you're saying?

    Mr. LEACH. Yes, ma'am.

    Mrs. KELLY. Thank you very much for clarifying that.

    Senator KYL. Mrs. Kelly, if I could add to that. I think it's going to be an ongoing challenge. Obviously, those engaged in criminal activities who want to launder money, or even a determined gambler, may well find ways to get around our efforts. However, what we're intending to do is to cover all forms of financial transactions, and we want to make it as inconvenient as possible, because we think that 95 to 99 percent of the people who find the convenience of sitting down at home at their computer and are able to punch their credit card number in are not going to go to that additional step of going to the Western Union station with cash.

    However, if a law enforcement entity knows that an entity offshore is engaged in accepting bets from the United States in violation of the law, they could then have the mechanism under Congressman Leach's bill, and under the legislation that we're drafting, to notify them that they are aware that this entity where the money is being wired to is engaged in illegal activity, and they would then be on a list that Western Union would have, or that a credit card company would have, or a bank would have, that said ''do not wire funds to this entity, because they're engaged in criminal activity in violation of the laws of the United States.''
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    I think that is probably the most effective way to deal with that particular type of transaction. I don't know if the gentleman from Iowa agrees.

    Mrs. KELLY. And your legislation would include the little money, check-cashing entities that will also wire money rather than just the big places like Western Union? In other words, you will cover everything?

    Senator KYL. Everyone will be covered. It will be up to law enforcement to take the necessary steps under the legislation and under the law after it's passed to be able to notify that entity that they cannot transfer money to the offshore entity that has been identified through a legal proceeding as engaged in activities in violation of the law in the United States.

    Mrs. KELLY. Thank you.

    Mr. GOODLATTE. Excuse me. I have a vote, I believe.

    Chairman BACHUS. I yield at this time to Mr. Grucci. I understand, Mr. Goodlatte, you have a vote. You may need to be dismissed. Mr. Leach has a bill on the floor, so he's been dismissed. Mr. Grucci, Senator Kyl is certainly anxious to answer your questions.


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    Mr. GRUCCI. Senator, I appreciate you sticking around. Just a quick question. We have the sites on the internet that are offshore where we probably don't have jurisdiction under the laws of the United States to enforce those laws there.

    You have situations where you can get the internet service into your home. You're suggesting a ban on internet gambling or regulations on internet gambling? And if I can, I'd like to follow up on that.

    Senator KYL. Mr. Grucci, this is a ban. It is not to regulate, but to prohibit internet gambling within the United States. This is what the State attorneys general asked us to provide, Federal enforcement of the policies that the States have right now.

    And you're correct, we couldn't exercise jurisdiction abroad over somebody setting up one of these sites. But, there are two ways to stop them from engaging in their illegal activity in the United States. One is to require the internet service providers to block the access from those sites at the point that they enter the United States. That's what the Senate bill did. And the other, which is being proposed by Representative Leach, is to enforce it by preventing the monetary transaction from ever being settled so that the payment would never be made to the gambling entity enforced through the banking regulators.

    Both of those enforcement mechanisms have promise, and what both the House and Senate decide to do at the end of the day with respect to having one or the other, or both, we'll have to decide upon. But primarily, we've been focused this morning on Representative Leach's idea of enforcing it through the banking regulators and the financial services entities.

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    Mr. GRUCCI. With gambling being such an old vice and embedded into society as deeply as it has been, do you think that banning it is the effective way to control it? When you look at the banning of alcohol during the 1920s, it certainly didn't accomplish the goal. Do you see that being akin to trying to ban the internet gambling? And if so, is there another vehicle that we could use to accomplish the same goal?

    Senator KYL. Mr. Grucci, of course all of the existing gambling that is legal in the States would continue to exist. So there are still plenty of gambling outlets for people. What we're saying is, though, the 1961 Wire Act, which prohibited the making of a sports bet by telephone or wire, would, in effect, be updated to say that if it's done by fiber-optic cable or microwave satellite transmission—it doesn't matter how it's actually transmitted—that it would be illegal.

    And in addition to that, these virtual casinos would be illegal as well. So it only covers that aspect of betting. But it would ban all forms of internet gambling. And we believe that through the enforcement mechanisms that have been suggested here that there is an adequate opportunity to enforce it. We also have testimony from people, over on the Senate side at least, that say that this is a particularly difficult kind of gambling to regulate. You can regulate a casino. You can regulate the horse track. It is very difficult to regulate internet gambling. And that's why the conclusion is both because it is pernicious, because it's a worse form of gambling than the others, and because it's more difficult to regulate, that the idea is to ban this particular kind of activity and then enforce that ban.

    Mr. GRUCCI. Thank you, sir. I yield back my time.

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    Mrs. KELLY. Thank you, Mr. Grucci.

    Mr. Manzullo, do I understand you would like to be recognized at this time?

    Mr. MANZULLO. Yes. Thank you very much. I appreciate your coming here. I agree with everything you're saying. The question is the constitutionality and the mechanisms of blocking an internet site. I think it is France that is presently blocking some internet sites? And I don't know if an issue went to the World Trade Organization on that. Mr. Goodlatte, do you have the information on that?

    Mr. GOODLATTE. Yes. It is a very controversial issue, and I very much understand the concerns of the internet service providers, because they are engaged in dealing with a whole host of different countries that want them to block different types of sites, including sites that here in the United States we would regard as a violation of our First Amendment free speech rights.

    That is not the case with regard to illegal gambling, because that has never been recognized as protected speech under the First Amendment. However, because we are in essentially an international marketplace, we have to be sensitive to the concerns that they have. While the French may say, well, that has no effect in our country; we don't recognize such a right. We want you to ban sites talking about hate speech or Nazi memorabilia and some of the different types of things that they have attempted to ban there.

    So we are looking at that and share the concern they have, but it does not have a constitutional implication whether or not we were to require blocking of gambling sites.
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    Mr. MANZULLO. Do you know the status of that action in France? Is it in courts, or what form?

    Mr. GOODLATTE. I don't know the exact details of it at this point in time. I think it is still an ongoing controversy in France.

    Mr. MANZULLO. Is it difficult for an internet service provider to try to block those sites?

    Mr. GOODLATTE. It has difficulties because the illegal gambling site you are attempting to block could change its information and switch off and take a new identity and avoid you that way. That's not a perfect solution for the illegal gambling entity, because they want to use their known e-mail address, their own website address as a means of communication. They would have to constantly change that. Blocking is not a perfectly effective tool. It is, however, done by the ISPs for their own purposes today if they are aware that somebody is engaged in activities that they do not approve of, or that are in violation of child pornography laws, and so, right now, they do presently block sites.

    Mr. MANZULLO. ISPs do block the websites that deal with child pornography?

    Mr. GOODLATTE. They do, yes.

    Mr. MANZULLO. Is that difficult for them to do that?
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    Mr. GOODLATTE. I don't think it's an easy proposition. And again, people are constantly finding ways to get around it, and that's why we don't think it is at all the perfect tool for combatting this, but it is one that we certainly have to weigh in the balance.

    Mr. MANZULLO. Senator Kyl, your bill places the burden upon the ISPs to block. Is that correct?

    Senator KYL. Congressman Manzullo, not exactly. The law enforcement entity, let's say, for example, the U.S. Attorney for the State of Arizona, would go to court and prove to the judge that there is an illegal site operating offshore and that the service provider for that site is XYZ service provider. The service provider could then be ordered by the court to come in and basically answer the following questions: Are you the one providing the service? Yes. Is it too expensive or too difficult for you to block the site? If they say yes and can demonstrate that, then they don't have to block the site. But if it is not too expensive or too difficult for them to do it, then the court could order them to block the site.

    So they have no monitoring burden. They're passive. They don't do anything until some law enforcement entity taps them on the shoulder and says ''You guys are carrying an illegal site here, and if you can do something about it, you should.''

    Mr. MANZULLO. Where does the ISP industry stand on your bill?

    Senator KYL. We worked out an accommodation with the industry in the Senate, or we wouldn't have gotten the bill through the Senate. But some of the sites that we dealt with, or some of the ISPs that we dealt with, said however, this is without prejudice to dealing with the House in a different way should we decide to do that. And at that point, I'll hand it off to Representative Goodlatte, because they had a little more aggressive stance here in the House. And in the end, they were one of the reasons why the bill didn't get through the House.
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    Mr. GOODLATTE. The fact of the matter is that we have worked with them and we did modify the language before it went to the floor, but the Senator is correct. They did have a very different approach dealing with us in the House than they did in the Senate, and we are continuing to work with them to try to address their concerns while still giving law enforcement effective tools to deal with the problem.

    Mr. MANZULLO. Thank you.

    Chairman BACHUS. This concludes the first panel. Let me say this. Our counsel, Tom Montgomery, noted a few minutes ago that both you gentlemen were really committed, as well as Mr. Leach, to the time you spent here this morning. You are not just interested in the issue or involved in the issue, but obviously willing to devote your time with other issues going on. And Senator Kyl, for you to come over from the Senate and devote this much time, not just sit in, you know, a cameo appearance, let me tell you, I think everyone in the audience, those of us who have been around the process, I think everyone has taken notice of that, and it speaks very clearly as to the level of your commitment and dedication to this.

    Senator KYL. Thank you, Mr. Chairman. You're correct that our degree of commitment is very, very intense. By the way, I don't ever mind coming back to the old House of Representatives here. I really enjoy it. I get a chance to visit old colleagues. Thank you.

    Chairman BACHUS. Mr. Leach actually, after his own amendment hit the floor of the House of Representatives, he continued to stay here and answer questions until he was actually asked for the third time to go to the floor.
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    Mr. GOODLATTE. I just want to thank you, Mr. Chairman, for allowing me to testify and for shining a spotlight on this very serious problem that we intend to address.

    Chairman BACHUS. Well, your testimony here today has energized this body. Thank you very much.

    At this time we will recognize the second panel. I'm going to introduce the first panelist, and then I'm going to defer to Mr. Ryun from Kansas to introduce the second panelist. There are six panelists.

    Mr. Michael L. Farmer, Senior Vice President of Wachovia Bank Card Services, I want to particularly—and I think Mrs. Kelly mentioned this—commend Wachovia for deciding that their credit cards would not be used for internet gambling purposes. And I think this is an occasion where a corporation stepped up to bat and did what was right. And I just wish that others had followed your lead. But I salute you and what Wachovia has done.

    Mr. FARMER. Thank you.

    Chairman BACHUS. Let me go to Mr. Ryun to introduce our second panelist.

    Mr. RYUN. Thank you, Mr. Chairman.

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    It's my privilege to introduce a friend of mine from the University of Kansas, which happens to be my alma mater, Bob Frederick, who just recently retired as the athletic director. He was there for 14 years. He has a long-time interest in college athletics. He has worked very hard with the National Collegiate Athletic Association on sports gambling. He began as a basketball student-athlete at the University of Kansas, and during his time there as athletic director did a wonderful job. I know one of his concerns has been watching a lot of what's happened with student-athletes going to prison as a result of their participation in illegal schemes, and we look forward to his testimony today. Thank you very much for coming. Thank you, Mr. Chairman.

    Chairman BACHUS. Thank you. Our third panelist is Mr. Mark VanNorman, who is the Executive Director of the National Indian Gaming Association. We welcome you, Mr. VanNorman.

    Mr. Edwin J. McGuinn, CEO of eLottery, we appreciate your testimony here. And Dr. Timothy A. Kelly, Former Executive Director of the National Gambling Impact Study Commission. I'm familiar with your work, Dr. Kelly, and commend you for your testimony.

    At this time we will start to my left with Mr. Mike Farmer, and we'll proceed down the row. Mr. Farmer.


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    Mr. FARMER. Chairman Bachus and Members of the subcommittee, good morning, if it's still morning. As introduced, my name is Mike Farmer, and I am Senior Vice President of Risk Management Operations for Wachovia Bank Card Services. Thanks for your invitation to participate in this hearing, as this is a very important issue.

    I have worked in the credit card and debit card industry for 14 years in various roles, but most intently focusing on risk management. In my current position, I have responsibility for fraud and credit losses and authorization system performance.

    It was late in 1999 that Wachovia was issued several summonses on lawsuits involving internet gambling. Our cardholders that incurred internet gambling debts and losses on their credit cards were calling upon the law to protect them from repayment of their debts. They cited that the transactions were illegal. At the time, in the absence of any immediate decision on lawsuits, Wachovia developed a policy to decline internet gambling charges in order to mitigate our losses.

    This policy was executed by systematically using the payment systems' merchant category codes and electronic commerce indicators to identify and decline the internet transactions. In order to communicate this policy to our customers, we issued a statement message which read:

    ''Please note: Due to various State legal restrictions governing gaming activities, Wachovia will no longer authorize internet gambling transactions made with your Wachovia credit card.''

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    Now it is understood that while this policy is being executed, its effectiveness is based entirely on the integrity of the data passing through the authorization system. As Wachovia and other credit card issuers deny authorization for internet gambling transactions, there are considerable incentives for merchants to circumvent this policy. For example, internet casinos may seek to conceal the true nature of their transactions by altering the data message to make themselves appear to be merchant types other than gambling institutions. In cases such as this, internet gambling charges may be unknowingly approved.

    In addition, alternate payment types can be used to complete internet gambling transactions. For example, a gambler may use a payment card or a checking account or other source of funds to establish an electronic cash account with a third party, which could then be used for internet gambling. Wachovia's systems would not capture these transactions as internet gambling.

    Now there are a number of other reasons why using financial institutions to control internet gambling would be of limited effect. In particular, it is important to recognize that alternative payment types such as automated clearing house payments and checks are not designed to allow for monitoring of payees.

    But once again, Wachovia appreciates the opportunity to participate in this hearing. We look forward to working with the subcommittee on this important issue.

    Chairman BACHUS. Thank you.

    Dr. Frederick.
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    Dr. FREDERICK. Mr. Chairman and Members of the subcommittee, I appreciate the opportunity to testify on behalf of the intercollegiate athletics community and to share with you our concerns about the rapid growth of sports gambling on the internet and the need for effective legislation.

    I currently serve as Chair of the NCAA Committee on Sportsmanship and Ethical Conduct. Sports gambling issues fall under our committee's purview. In addition, I recently concluded a 14-year tenure as Athletics Director at the University of Kansas. As a long-time college athletics administrator and coach, I am very much aware of the dangers that sports gambling presents. I have witnessed the struggles of my colleagues in the aftermath of point-shaving scandals on their campuses, and I have sadly watched young student-athletes go to prison as a result of their participation in these illegal schemes.

    Sports gambling has been a threat to the integrity of our collegiate contests. However, the most significant change since I was a basketball student-athlete at the University of Kansas, is the rise of the internet and its ability to make sports gambling accessible from almost anywhere. In just 5 years, internet gambling has grown from a dozen, to according to our sources, 1,400 unique gambling websites.

    Despite Federal and State laws prohibiting sports gambling over the internet, offshore operators continue to market aggressively their products in the United States. Advertisements in in-flight magazines, on sports talk shows, in newspapers, in billboards, all tout the excitement and the ease of placing sports bets over the internet. Visit any college campus and I assure you you will hear about the number of unsolicited e-mail ads received by students from sports gambling sites.
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    Unfortunately, almost all of this illegal activity continues to thrive virtually unchecked in the United States. Its impact is already being felt in the intercollegiate athletics community. NCAA staff members have begun processing rules, violation cases involving internet sports gambling. It's clear that internet sports gambling is flourishing in the U.S.

    As a father of four sons, three of whom are currently either in college or coaching on a college campus, I am concerned that the growth of internet gambling could be fueled by college students. Today's college students undoubtedly are the most wired group in the United States. They can surf the web in their school library, in the computer lab, or the privacy of their campus housing. The emergence of internet gambling now enables students to wager behind closed doors anonymously and with a guarantee of absolute privacy.

    How do students have the means to place bets online? Credit cards. According to a 2000 survey by Nellie Mae, 78 percent of college students have credit cards and 32 percent have four or more cards. The average credit card balance for undergraduates has risen nearly 50 percent since 1998. One-in-10 students will graduate with balances exceeding $7,000.

    Unfortunately for some, internet gambling may stand in the way of obtaining their college degree. Last year at a House Congressional hearing, a NCAA witness played a videotape account of a college student who, in just 3 months, lost $10,000 gambling on sports over the internet. He reported that a friend at another institution lost $5,000 on a single internet wager on the Super Bowl and was forced to drop out of school.

    Unfortunately, these stories are not unique. The NCAA has heard similar accounts, and the news media has been widely reporting on this rapidly growing problem among young people. Clearly, there is a need to address this issue.
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    For the past 4 years, the NCAA has worked closely with the House and Senate sponsors of internet gambling prohibition legislation. Of course, we are concerned that despite the 1961 Wire Act, internet sports gambling continues to prosper in the United States. Clearly, as the internet goes wireless, there is need to update current statutes related to sports gambling so that the laws keep pace with technology.

    In addition, any proposed legislation must provide an effective enforcement mechanism that will impact an industry that is located outside the United States. This is critical, and the success of any legislative effort will be dependent on ensuring that law enforcement agencies have the priority to crack down on violators.

    The NCAA is pleased that this subcommittee is examining ways to address internet gambling. It is our hope that with the passage of Federal legislation, any further growth related to sports gambling on the internet will be achieved largely without United States participation. Thank you.

    Chairman BACHUS. Thank you, Dr. Frederick.

    Mr. VanNorman.


    Mr. VANNORMAN. Thank you, Mr. Chairman, Members of the subcommittee. My name is Mark VanNorman. I'm the Executive Director of the National Indian Gaming Association (NIGA), and our Chairman, Ernie Stevens, sends his regrets that he is unable to be here today, but he had a death in his family.
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    NIGA is an association of 168 tribes engaged in governmental gaming to fund governmental programs and community infrastructure.

    Chairman BACHUS. Mr. VanNorman, would you pull that mike a little closer? And I know that it does appear that when you pull it close, it appears it's echoing, but it is better.

    Mr. VANNORMAN. Certainly. About 196 of the 561 tribes in the United States engage in gaming. That's about 40 percent. By comparison, 37 of the 50 States operate State lotteries, just over 70 percent.

    I'll just touch on three points: The Indian Gaming Regulatory Act; the strength of tribal regulatory systems; and our position on internet gaming.

    To begin with, I should make very clear that we are not seeking to move the overall internet gaming debate. We are not generally in favor of legislation, nor do we generally oppose internet legislation. Our position is that if internet gaming is permitted in the United States, then Indian tribes should have a fair and equitable opportunity to use the modern technology of the internet.

    The United States in its Constitution, treaties and laws has consistently recognized that Indian tribes are sovereigns that possess governmental authority over their members and territory. Through the Indian Gaming Regulatory Act, Congress acknowledged the sovereign status of tribes and sought to protect Indian gaming as a means to generate tribal economic development and tribal government revenue. And the Act works. Indian gaming provides 250,000 jobs nationwide. Indian tribes use their governmental revenue to build schools, hospitals, water systems, roads, and to fund education, health care, day-care, after-school programs, elderly nutrition, and police and fire protection.
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    Indian gaming also helps tribes overcome the barriers to economic development in Indian country: The lack of infrastructure and the lack of investment. Tribes are using Indian gaming revenue to diversify their economies. And Indian gaming benefits neighboring communities. For example, after an Air Force base closed in central New York with the loss of 2,000 jobs, the Oneida Nation opened its gaming facility, hotel, restaurant, golf course and events center in central New York and employs 3,000 people.

    Of course, Indian gaming doesn't cure all our problems. Most tribes are still struggling with poverty because our remote lands are not accessible to people. To give you an understanding of the situation, the Federal Communications Commission reported in 1999 that only 49 percent of Indian reservation households have telephones. The Indian Health Service reports that 43 percent of Indian children under the age of 5 live in poverty. In Indian country, we still have a long way to go to catch up with the rest of America.

    Internet gaming is an expanding industry generating substantial revenue. Nevada and the Virgin Islands are now working to establish legal regimes to regulate internet gaming. Industry and computer experts are now working to overcome problems of internet gaming such as remote identification systems to verify that all bettors are adults. And many believe that these issues will be resolved soon.

    In our view, if internet gaming is to be permitted in the United States, Indian tribes should have a fair and equitable opportunity to participate in that gaming. When Congress enacted the Indian Gaming Regulatory Act in 1988, Congress was aware that Indian tribes were remote and isolated, and Congress authorized the use of the wires and also made clear that Indian tribes should have access to modern technology. Of course, that was prior to the rise of the internet, but we believe tribes should have access to this technology as well as others.
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    Internet gaming would permit players to access remote Indian lands and provide economic opportunity for the tribes that are otherwise too remote for gaming. In our view, it makes sense for tribes to have access to internet technology, because we already have strong regulatory systems in place. Tribes dedicate substantial resources and personnel to regulate gaming comparable to the resources that Nevada, New Jersey and other State gaming regulatory systems employ.

    Tribes have highly qualified, experienced, and effective regulators. In addition, our system is backed up by the National Indian Gaming Commission, which reviews licenses, audits, management contracts and tribal ordinance.

    The U.S. Department of the Treasury's Financial Crimes Enforcement Network also works with tribes to safeguard our gaming facilities from Bank Secrecy Act violations, and the Justice Department has authority to prosecute anyone, employee or customer, who might steal from an Indian gaming facility. In our view, tribes are well situated to conduct internet gaming, and any internet gaming legislation should treat tribes fairly.

    If the legislation takes the form of a Federal prohibition with exceptions for State lotteries, horse and dog tracks, jai-alai and fantasy sports betting, the Indian tribes should be able to engage in internet gaming in a similar manner. If the legislation takes the form of State option legislation, then the Indian tribes should have the option to engage in internet gaming where such gaming is permitted. Of course, any legislation should contain a savings clause to ensure that it does not impact existing Indian gaming.

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    The fundamental concept of the Indian Gaming Regulatory Act is that tribes have an inherent right to engage in economic activities to generate tribal governmental revenue and build livable tribal economies. If internet gaming is to be a permitted activity in the United States, tribes should have a fair and equitable access to internet gaming.

    That concludes my remarks. Thank you.

    Chairman BACHUS. I appreciate that.

    Mr. McGuinn.

    Mr. MCGUINN. Thank you, Mr. Chairman.

    Chairman BACHUS. It is Mr. McGuinn?

    Mr. MCGUINN. It's McGuinn.

    Chairman BACHUS. McGuinn.

    Mr. MCGUINN. Close enough. There are many variations.

    Chairman BACHUS. I've missed it three times. Thank you.

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    Mr. MCGUINN. My name is Ed McGuinn, and I'm the CEO of eLOT, Inc. We do business under the name of eLottery. We are a Connecticut- and New York-based company. We are the leading provider of web-based retailing and internet marketing services exclusively for governmental without being governmental lotteries.

    A brief review of our core competencies. We've conducted millions of e-commerce lottery transactions using a full line of internet and telephone-based applications.

    We've developed and field-tested technology that assures necessary security, age and border controls required to process a lottery transaction.

    We presently provide sophisticated internet-based marketing services for the Idaho Lottery, Indiana's Hoosier Lottery, the New Jersey Lottery, the Jamaica Lottery, and the Maryland Lottery.

    I appreciate the opportunity provided to me by the subcommittee and I hope that I will be able to shed some light on how our company, and others like us, can provide service to State and governmental lotteries. I would also like to buttress the testimony given to this subcommittee by Ms. Penelope Kyle, the Director of the Virginia Lottery and the current President of the National Association of State and Provincial Lotteries, also known as NASPL. At that time, Ms. Kyle said that NASPL could not support any legislation that would remove the authority of the governors and State legislatures in regulating the sale of their lottery tickets. This has been a right that has been traditionally reserved to the States, and they have experienced no major problems to this date in implementing a regulatory process and enforcing those regulations.
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    The issue that I am discussing here today is focused solely on the purchase of authorized State lottery tickets over the internet. The issue of State lotteries has been long-since resolved in the United States. Today there are 38 State lotteries and the District of Columbia, and just this year the legislature of Nevada authorized the creation of a lottery in Nevada.

    The funds from these lotteries have gone to a wide variety of public causes, most notably education. Using the latest numbers available, we find that Ohio has provided over $700 million for education; in New York, approximately $1.4 billion was sent to education; and in Massachusetts, approximately $800 million was provided to local towns and cities. The list goes on. But clearly, lotteries are being very responsible with their funding.

    E-commerce—in my opinion, and I would like to think also yours—is here. We see it in every facet of life. We are told that we will shop on the internet for all things in the future, and in many cases, the future is now.

    Now I would like to address some arguments that have been put forward in the past in opposition to lottery tickets being sold on the internet. As Ms. Kyle stated previously, this is moving into the area of restricting the rights of governors and legislatures to control their own lotteries. NASPL objects to this, and we agree with them on this key point. We find it incomprehensible that Congress would allow wagers on horse racing and other parimutuel events, but restrict the activities of an authorized State lottery, especially when approximately 30 percent of the gross proceeds are targeted to good causes like education.

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    Another point deals with some of the red herring arguments that have surfaced by those that would ban the sale of lottery tickets over the internet. The first argument against the sale of lottery tickets has been that people will be able to buy lottery tickets around the Nation, and this is utterly false. States now prohibit the sale of lottery tickets across State lines, and if you are resident of the State of Ohio and the Ohio Lottery decides to authorize the sale of tickets over the internet, then only Ohio residents can buy them. Again, the registration process will detect anyone that is not an Ohio resident. But let us assume that someone finds a way around the system. They purchase a winning ticket in the Ohio Lottery, and they are not a resident of Ohio. The lottery knows the ticket was purchased over the internet, just as they know which store sold a ticket, and they will deny payment of any prize.

    The State lottery industry has already adopted and has been conducting sales of lottery tickets using the U.S. Postal Service. Applications are received by mail containing their name and address. Only in-State applications are processed; out-of-State applications are rejected. Instead of using the U.S. Postal Service to deliver the application, we would deliver the application by e-mail. Same rules. Same controls, both as far as border and age control. Simply a more efficient delivery mechanism.

    Another argument against the sale of lottery tickets over the internet is this would allow minors to purchase lottery tickets. Notwithstanding Senator Kyl's comments, this argument does not have a factual base to support its claim. There are no studies available to suggest that minors are interested in playing the lottery. Every study shows that base players for State lotteries are middle- and older-aged Americans. Further, internet sales would use the same process already adopted by the States in their subscription sales. Instead of the application being delivered by the U.S. Postal Service, the application would delivered by e-mail.
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    In closing, what I would like to do is take the subcommittee through a process whereby a player would be able to purchase a ticket over the internet. If a State authorized eLOT, or any other vendor in the field, to become a vendor for their lottery tickets, the player would go to our website, or the State's very own website, and register to play. They would be required to submit their name, address and age. Right now, eLottery is using Equifax, a very significant and large data information provider, along with Department of Motor Vehicle and voter registration records, regarding this important and necessary control. This information would be checked against comprehensive data sources for correctness.

    Once it had been determined that the player was, in fact, a resident of the State in question and over the legal age, the player would be issued a PIN number and a password to access the site where the purchase could be made. I should point out that eLottery does not purchase the ticket for the player. We only facilitate the purchase through the normal electronic channels that the players currently buy valid tickets.

    In summary, we strongly support the concept of States regulating their own State lotteries. Some States have already decided not to offer lottery tickets over the internet while others have received authorization from the State legislature to do so.

    I have no comment on regulation of other forms of gaming, but I urge the Members of the subcommittee to consider the slippery slope they enter upon as they begin to further erode the rights of States to regulate commerce within the States borders.

    I thank you all for your time and will respectfully respond to any questions that the Members may have.
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    Chairman BACHUS. I thank you.

    Dr. Kelly.


    Dr. KELLY. Good morning, Mr. Chairman, Members of the subcommittee. I am Dr. Tim Kelly, former Executive Director of the National Gambling Impact Study Commission. I do appreciate this opportunity to give testimony on internet gambling, especially as it relates to H.R. 556 and other internet gambling legislative proposals.

    As you know, in 1996, Congress created the National Gambling Impact Study Commission and charged us with studying the economic and social effects of legalized gambling in America. The report has 77 far-reaching recommendations, but most importantly for this subcommittee, the report calls for prohibition of internet gambling not already authorized. This is especially noteworthy in light of the fact that four of the nine commissioners represented or endorsed the gambling industry.

    The Commission came about as a result of the expansion of gambling in America over the last 20 years or so, from an industry that took in about $1 billion profit to over $50 billion last time we counted. Gambling expansion, however, has come with a high social cost, and we mustn't lose sight of that. 15.4 million Americans today at least are already suffering from problem and pathological gambling, also called gambling addiction, which is devastating to both the individual and the family. We hired the National Academies of Science to do a study on this topic. They stated—and they are not known for overstatement—quote: ''Pathological gamblers engage in destructive behaviors. They commit crimes. They run up large debts. They damage relationships with family and friends, and they kill themselves.'' End quote.
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    In fact, it's not unusual for a gambling addict to end up in bankruptcy with a broken family, facing a criminal charge from his or her employer. These matters are relevant to internet gambling.

    What I would like to do—in fact, my submitted testimony is largely out of the chapter on internet gambling that's in our final report—I'll just walk you very quickly through some of the most salient points there.

    The first chapter is entitled ''Candidates for Prohibition.'' There are three reasons why prohibition should be considered for internet gambling. The first has to do with youth gambling. Because the internet can be used anonymously, the danger exists that internet gambling can be abused by underage gamblers. In most instances, a would-be gambler merely has to fill out a registration form in order to play. Most sites rely on the registrant to disclose his or her correct age and make little or no attempt to verify the accuracy of the information. Underage gamblers can use their parents' credit cards, or even their own credit cards, and set up accounts. Given their knowledge of computers and familiarity with the web, young people may find gambling on the internet hard to refuse. In fact, I think it was that concept that most drove the commissioners to consider prohibition. The idea that this form of gambling would be beamed into the homes, the dens, the bedrooms, the dorms, across America. That was the first candidate for prohibition.

    The second reason for considering prohibition is the issue of pathological gambling, or gambling addiction. Pathological gamblers are quite susceptible to internet gambling. Because internet gambling comes with a high level of privacy, it exacerbates the problem of pathological gambling. Pathological gamblers can traverse dozens of websites and gamble 24 hours a day, so experts in the field of pathological gambling have expressed concern over the potential abuse of this technology. The director of Harvard Medical School's Division on Addiction Studies stated that: ''As smoking crack cocaine changed the cocaine experience, I think electronics is going to change the way gambling is experienced.''
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    Third was criminal activity. I think that's been covered by the others. Money laundering and fraud were mentioned in our report. I will skip over that since my time is running kind of short here.

    The fourth section dealt with the fact that the Wire Act of 1961 is indeed ambiguous, and it leaves a lot of questions unanswered. Does it or does it not apply to the internet? That's not clear. Where are bets and wagers actually taking place when one places a bet on the internet? Are they taking place on the site where the person downloads a web page? Is it at the site of the bank account or the credit card companies? These questions would need to be addressed if ever legal action is going to be taken.

    We noted, too, as has been noted here, that the National Association of Attorneys General unusually asked for help here. Usually they take a position against Federal intrusion. However, they did send us a statement, which I believe Senator Kyl referred to, that they have taken the unusual position that this activity must be prohibited by Federal law and that State regulation would, in fact, be ineffective.

    As a result of these things, the Commission came up with four recommendations. The first was to prohibit internet gambling not already authorized. The second was to prohibit wire transfers and credit card debts related to those wire transfers. The third recommendation was to not permit the expansion of any form of gambling into America's homes. And the fourth was to encourage, or enable, foreign governments to work against these very things as well.

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    In conclusion, the Commission found that internet gambling poses a potential threat to the Nation. It puts our youth at risk, exacerbates pathological gambling and opens the door for fraud and money laundering.

    H.R. 556 prohibits financial transfers and calls for working with other nations, and it would help limit in-home gambling. But all of this would apply to, quote: ''unlawful internet gambling.'' This implies, of course, that there are lawful forms of internet gambling as well, and opens the door to endless debate as to whether or not a given internet gambling site is legal. In so doing, H.R. 556 skips over the primary Commission recommendation on internet gambling prohibition, even though it addresses the other recommendations well.

    The subcommittee now has before it an alternative bill for consideration, H.R. 2579, that removes the word ''unlawful'' from that text. This would prohibit internet gambling per se, and in my opinion, more closely accomplish the full recommendations of the National Gambling Impact Study Commission on this critical matter. So although H.R. 556 is a good bill worth supporting, the alternative is, in my opinion, even better.

    Thank you, Mr. Chairman, for this opportunity to speak with you today, and I will be glad to answer questions.

    Chairman BACHUS. I appreciate that, Dr. Kelly.

    I'm just going to make two comments. One is, having read Dr. Kelly's testimony last night, it is astounding how in the last 30 years we've moved from where we heard of people going to Nevada to gamble, or where they went down to the dog track, to today when it's in the home. It's a profound change in our society, and I think it has implications for all of us.
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    The other thing I'd say, I have five children. Thankfully, three of them are out of school. One of them is a senior. Having read Dr. Frederick—I do have a 16-year-old, and having read your remark that a number of unsolicited e-mails are now coming over the internet promoting sports gambling, I'm happy that four of them are almost out of school. But you've given me another reason to worry about that 16-year-old who is an avid sports fan. So that's one more thing to worry about.

    I would ask unanimous consent that my 5 minutes be yielded to the gentleman from Vermont—I mean from Virginia. You look so much like Bernie Sanders.


    Mr. Goodlatte.

    Mr. GOODLATTE. That's scary, Mr. Chairman. I do appreciate your generosity in allowing me to ask questions.

    Mr. Farmer, I've read your testimony and I'm encouraged that Wachovia has taken the initiative to attempt to screen out these transactions by customers with illegal gaming entities, or gaming entities that are engaged in activities that may be illegal in the United States. And I understand you've experienced some difficulties with people changing the codes with regard to the nature of the transaction and so on.

    How would you react to a different approach, which would be to have a law which says that under circumstances where law enforcement presents evidence to a court that a gambling merchant, if you will, is engaged in illegal activities by offering these services in the United States—in other words, they're set up, say, on the island of Antigua. Maybe a perfectly legal activity there and in other countries, but when they offer those services to U.S. citizens, they're engaging in illegal activity.
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    Law enforcement could present evidence that they are doing just that, get an order, and the court order would then allow them to notify various financial institutions that this activity is taking place, and those institutions would cut off services. For example, if you're administering a Visa card or a MasterCard, you'd cut off that institution from being able to engage in any credit transactions because of their illegal activities in violation of the law here. That, to me, seems to be a more effective way to get the message to them that they can't violate U.S. laws.

    Mr. FARMER. It's an interesting idea, and I think it definitely has some merit. The problem would be in execution in this case, because even if we were to know the name of the institution, it doesn't mean that that name is going to be reflected when they authorize or settle a transaction. And therefore, we may unknowingly participate in payment of that debt.

    Mr. GOODLATTE. We would have to give you immunity from any liability for doing that where they attempted to disguise exactly who they are. But that would be the approach that I would recommend to the subcommittee.

    Mr. McGuinn, I'm interested in your comments regarding the ability to keep this from crossing State lines. When somebody in Virginia goes into Maryland, buys a lottery ticket and they win, the State of Maryland doesn't say, ''Well, you're a Virginia resident, you can't recover your winnings.'' Would you propose to have a different treatment of the consuming bettors if they buy the ticket online, as opposed to if they buy it in a convenience store?

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    Mr. MCGUINN. Well, I think it really depends on each State's interpretation. And at the end of the day, it's not eLottery that's going to mandate what's appropriate from security, age, or border control standards that could be used on a State-by-State basis.

    Mr. GOODLATTE. But, if we were to buy your argument that we should let the State do what it wants to within its borders, we would have to be absolutely assured that this is not going to bleed over into other States and that it become an interstate lottery system by people simply doing what Mr. Farmer says the folks can do with regard to credit card transactions—conceal who they are or where they are. They could say, ''Well, I live in Virginia, but I was in Maryland at my relative's or on a convenience store's internet device when I purchased this ticket over the internet.'' We've got to have a way to screen out that type of activity if we're going to follow the proposal that you recommend.

    Mr. MCGUINN. I appreciate that. And at the end of the day, I think there are acceptable border-control internet provider filtering capabilities and age control databases that are available that can give the individual States and their representative executive directors of that authorized lottery the power to put that into process.

    Mr. GOODLATTE. If somebody's 15-year-old son says that they are their father instead of the 15-year-old son, how do you know that that's the case when they're doing this online?

    Mr. MCGUINN. Well, depending upon the sophistication that may be warranted by each individual State, at the highest end of the level is biometrics, which could be something very expensive as retinal scanning, which would certainly not be a good application this early in the technology curve. But look at some of the processes that Equifax uses for example. They ask very significant financial or information questions, which I don't expect my 14-year-old daughter, or 18-year-old daughter, or 21-year-old daughter to know. Where is your mortgage? What do you think the balance is? Tell me what credit cards you have. Some information that would not be readily applicable or available to a child.
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    And as I said, you can create as deep a filter as would be of some value. I might add, the same questions are not being asked of kids in my neighborhood that are buying alcohol or buying cigarettes who are under age at the convenience store level. So in one instance, you're really holding the internet to a much higher standard. The good news is, the internet is not anonymous. I would probably beg to differ with Dr. Kelly's comments from that standpoint. There is sufficient information that can be drawn out within a dialogue between this particular sale, if you like, using the databases that are available to satisfy, I think, every Member of this subcommittee and certainly the requisite State lottery directors.

    Mr. GOODLATTE. Thank you. Mr. Chairman, I appreciate your forbearance.

    Chairman BACHUS. Thank you.

    Mr. McGuinn, I was legal counsel for the Alabama Beverage Control Board for some period of time. If my teenager goes down to the local convenience store, 16 years old, he would have to show a valid driver's license before he could buy liquor. He would also, even if he showed an illegal credit card, be responsible if they sell him liquor, because they're supposed to actually check that. That would be quite different from him getting on the internet and gambling, wouldn't it? There's certainly a gatekeeper at the convenience store. I guess I don't see the analogy.

    Mr. MCGUINN. Well, qualitatively, the gatekeeper has some wide variances. And in some cases, the ulterior motive is to grow sales and it's a high-margin sale. So I appreciate the fact that there is a physical I.D. of a process more often than not. But the problems break down with the quality of the staff, and I would probably also ultimately argue with the fact that the identification—it's not too hard to get fake proof, unfortunately, and I can speak about that. I have kids about the same age as yours, and a couple of more in college. So it's a distressing issue to me as a parent.
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    I take a lot more comfort from the fact that for using database services like Aristotle, Equifax and the like that they can ask some very, very significant questions which I would have some pretty strong comfort that my 21- or 18-year-old are not going to know. And I think that creates a gatekeeper. Granted, a cyber gatekeeper. But at the end of the day, questions which I think are very important. The fact that I can tie into, in many States, both Department of Motor Vehicle and also voter registration databases can be used as a supplementary value.

    So I think there's some pretty good capabilities out there, and we're not even talking about biometrics, which again I think is a couple of years down the line, but ultimately represent opportunities to be using fingerprints and other types of scanning capabilities. There are also, I might add, some ''net nanny'' products that are out there, where you can use a mouse to simulate your signature, which ultimately has some broad value. And as I said, I think you'd be pleasantly surprised with some of the emerging trends right now relative to security on the internet, both as far as age, border control, and ultimately the IP considerations as to where and what venue a particular person logs on.

    Chairman BACHUS. And the way to get around the liquor thing is someone else goes in and buys it. But then if an underage youth drinks, he can be arrested. There's a law against that that's easy to enforce, at least. But, you know, right now the law on internet gambling isn't in force.

    Mr. MCGUINN. Well, let's differentiate, Mr. Chairman, between the purchase of lottery tickets from playing offshore. The important thing is, you can't cash the ticket. If an underage youth goes in and tries to cash the ticket, they're not going to get it.
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    Chairman BACHUS. You're not talking about sports gambling? You're simply talking about the lottery, and your testimony is totally restricted to that.

    Mr. MCGUINN. We are a service that works with authorized State lotteries supporting intrastate sales. So from that standpoint, I'm very deeply in agreement with Dr. Frederick's comments regarding sports betting. I appreciate Dr. Kelly's comments. Again, I take comfort from the fact that there are major studies out there where youths—and I'll define that as 16 to even 25 if we want to broaden the range—are not interested in lottery tickets. They do like the experience of going into an offshore gaming site where it's exciting. You can bet $50 and win $50. It's a little bit different.

    Chairman BACHUS. So your testimony is that the States ought to have the right to sell lottery tickets over the internet?

    Mr. MCGUINN. Exactly right.

    Chairman BACHUS. OK. That concludes our hearing. I appreciate you gentlemen being here today. I would say this. I would like the subcommittee, without objection, to also include in the record the Nellie Mae Government survey of credit card use by collegiate students. We've heard some of those same statistics in our bankruptcy hearings and in our credit card hearings. But I think that would be very enlightening for the subcommittee to have.

    Also, without objection, the record for this hearing will remain open for 45 days to allow the Department of the Treasury and the Department of Justice to submit written statements and to permit Members to submit questions in writing to the witnesses and have their responses placed in the record.
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    With that, I appreciate this panel, appreciate their testimony, their attendance here today. And I now adjourn this hearing. Thank you.

    [Whereupon, at 12:15 p.m., the hearing was adjourned.]