SPEAKERS CONTENTS INSERTS
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86–705 PDF
2003
UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT AND THE INTERNET GAMBLING LICENSING AND REGULATION COMMISSION ACT
HEARING
BEFORE THE
SUBCOMMITTEE ON CRIME, TERRORISM,
AND HOMELAND SECURITY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
ON
H.R. 21 and H.R. 1223
APRIL 29, 2003
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Serial No. 25
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois
HOWARD COBLE, North Carolina
LAMAR SMITH, Texas
ELTON GALLEGLY, California
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
WILLIAM L. JENKINS, Tennessee
CHRIS CANNON, Utah
SPENCER BACHUS, Alabama
JOHN N. HOSTETTLER, Indiana
MARK GREEN, Wisconsin
RIC KELLER, Florida
MELISSA A. HART, Pennsylvania
JEFF FLAKE, Arizona
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
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STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
JOHN CONYERS, Jr., Michigan
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California
LINDA T. SÁNCHEZ, California
PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel
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Subcommittee on Crime, Terrorism, and Homeland Security
HOWARD COBLE, North Carolina, Chairman
TOM FEENEY, Florida
BOB GOODLATTE, Virginia
STEVE CHABOT, Ohio
MARK GREEN, Wisconsin
RIC KELLER, Florida
MIKE PENCE, Indiana
J. RANDY FORBES, Virginia
ROBERT C. SCOTT, Virginia
ADAM B. SCHIFF, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
JAY APPERSON, Chief Counsel
SEAN MCLAUGHLIN, Counsel
ELIZABETH SOKUL, Counsel
KATY CROOKS, Counsel
PATRICIA DEMARCO, Full Committee Counsel
BOBBY VASSAR, Minority Counsel
C O N T E N T S
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APRIL 29, 2003
OPENING STATEMENT
The Honorable Howard Coble, a Representative in Congress From the State of North Carolina, and Chairman, Subcommittee on Crime, Terrorism, and Homeland Security
The Honorable Robert C. Scott, a Representative in Congress From the State of Virginia, and Ranking Member, Subcommittee on Crime, Terrorism, and Homeland Security
WITNESSES
Honorable James A. Leach, a Representative in Congress From the State of Iowa
Oral Testimony
Prepared Statement
Mr. John G. Malcolm, Deputy Assistant Attorney General, Criminal Division, U.S. Department of Justice
Oral Testimony
Prepared Statement
Mr. Jeffrey Modisett, Counsel, Bryan Cave, LLP, and former Attorney General, State of Indiana
Oral Testimony
Prepared Statement
Mr. William J. Hornbuckle, President and Chief Operating Officer, MGM Mirage Online
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Oral Testimony
Prepared Statement
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The Honorable Sheila Jackson Lee, a Representative in Congress From the State of Texas
APPENDIX
Material Submitted for the Hearing Record
Prepared Statement of the Honorable Howard Coble, a Representative in Congress From the State of North Carolina, and Chairman, Subcommittee on Crime, Terrorism, and Homeland Security
Prepared Statement of the Honorable Bob Goodlatte, a Representative in Congress From the State of Virginia
Questions submitted by Rep. Bob Goodlatte to John G. Malcolm and William J. Hornbuckle regarding H.R. 21, the ''Unlawful Internet Gambling Funding Prohibition Act''
Response, with attachments, from William J. Hornbuckle to questions submitted by Rep. Bob Goodlatte
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Response from John G. Malcolm to questions submitted by Rep. Bob Goodlatte
Questions submitted by Rep. John Conyers, Jr., to John G. Malcolm regarding H.R. 21, the ''Unlawful Internet Gambling Funding Prohibition Act''
UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT AND THE INTERNET GAMBLING LICENSING AND REGULATION COMMISSION ACT
TUESDAY, APRIL 29, 2003
House of Representatives,
Subcommittee on Crime, Terrorism,
and Homeland Security
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:04 p.m., in Room 2237, Rayburn House Office Building, Hon. Howard Coble [Chairman of the Subcommittee] presiding.
Mr. COBLE. Good afternoon, ladies and gentlemen. The Subcommittee on Crime, Terrorism, and Homeland Security will come to order.
Today we are—at the outset I want to apologize to you all for my raspy voice. I have been plagued with a bad cold, so you all bear with me as we go along here.
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Today we address a serious and growing problem for our country: the problem of Internet gambling. It is now estimated that $4.2 billion is wagered over the Internet each year. This is an increase from $445 million just 6 years ago. There are currently more than 1,800 Internet gambling sites, and the total dollar amount wagered worldwide is expected to reach $10 billion in the near future.
The most troubling aspect of Internet gambling is the relative ease of accessibility for our Nation's children. The anonymous nature of the Internet makes it almost impossible to prevent underage gamblers from using their parents' credit cards, or even their own in some cases, to log on to a gambling website. Many Internet sites require nothing more than a name, address, and a credit card number. Those sites that do require a person to disclose his or her age make little or no effort to verify this information.
Another group particularly susceptible to Internet gambling are Americans' problem, or addictive gamblers. The National Council on Problem Gambling estimates that there are currently 11 million Americans directly suffering from gambling problems. High rates of financial debt, unemployment, bankruptcy, divorce, homelessness and suicide are all associated with problem gambling. Various casinos and their video game structure have been labeled ''the crack cocaine of gambling''.
These facilities are open for the most part 24 hours a day, 7 days a week, all within a person's own home. By making gambling more convenient, it can do nothing but make the problem worse.
In addition to the social problems associated with Internet gambling, these Internet sites also offer organized crime groups a very simple and easy opportunity to launder the proceeds of their criminal activity. Because of the lack of oversight or regulations, and the high degree of anonymity, money laundering through Internet gambling sites is already a major concern to our Nation's law enforcement agencies.
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Federal law is currently unclear as to whether or not all types of Internet gambling is illegal. The statute that most directly restricts the use of the Internet to place bets is the Wire Act under section 1084 of title 18 of the U.S. Code. However, because this statute was written prior to the age of the Internet and the use of the wireless communication, there is ambiguity as to what type of bettering is or is not covered. Also, the types of gambling mentioned in the statute may not cover all the different types of gambling available on the Internet.
Today we will examine two bills that attempt to address the problems of Internet gambling in two very different ways. H.R. 21, the ''Unlawful Internet Gambling Funding Prohibition Act,'' introduced by our friend from the Heartland, Congressman Jim Leach of Iowa, seeks to ban Internet gambling by prohibiting the use of financial instruments such as credit cards in any transaction involving illegal Internet gambling.
H.R. 3215, the ''Combatting Illegal Gambling Reform and Modernization Act,'' introduced by Congressman John Conyers of Michigan, the Ranking Member of the full Judiciary Committee, seeks to establish a commission to study the feasibility of regulating Internet gambling rather than banning it.
I look forward to the testimony of the witnesses here today, which will help this Subcommittee decide what is the best approach to take with regard to this very important subject.
Now, prior to recognizing the distinguished gentleman from Virginia, the Ranking Member, I am advised that a Member of our Subcommittee will be celebrating a date of birth tomorrow, and with your permission, sir, I will extend a ''happy birthday'' greeting to you.
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I now recognize the Ranking Member.
Mr. SCOTT. Thank you, Mr. Chairman.
You know, when I was growing up, we would always declare a ''birthweek.'' I didn't know that was going to extend to my congressional tenure. Thank you, Mr. Chairman.
I am pleased to join you in convening this hearing regarding the Federal regulation of gambling over the Internet. I would also like to thank you and your staff for working with the minority on a bipartisan matter to develop the hearing and select witnesses for it.
Mr. Chairman, gambling has traditionally been primarily a State regulatory responsibility. It should continue to be so, in my judgment, although it is appropriate for the Federal Government to have a role to assist States in the total regulatory scheme. The Federal Government undertook such a role in passing the 1961 Wire Communications Act as a way to assist the fight against gambling by organized crime syndicates. The Department of Justice contends that it can prosecute Internet gambling businesses under that law, but clearly, that law was not designed with Internet gambling in mind. So I appreciate the desire of my colleague, the gentleman from Iowa, to update the ability of the Department to address illegal gambling in today's context.
However, I am concerned that his bill, H.R. 21, similar to the bills in the last several Congresses which attempted to regulate gambling, is not likely to be effective in doing so. When we address the real question on Internet gambling, we must acknowledge that the horses are literally already out of the gates. So let's be clear that the bill is not about prohibiting Internet gambling; it is only about regulating Internet gambling, and then only with respect to the United States' Internet gambling market.
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Regulating anything on the Internet is problematic, even when desirable. Most law enforcement is jurisdictionally dependent. The Internet has no jurisdiction and, as a result, I suspect that, even if we are successful in closing down business sites in the United States, or in countries that we can get to cooperate because of the Internet and electronic funds transfer, the approach of H.R. 21 will be ultimately ineffective. The gambling website can simply code an Internet gambling transaction as another type of transaction and thereby evade the total enforcement mechanism in the bill, or an e-cash or electronic payment system can relocate in another country and thereby evade the enforcement mechanisms in the bill.
Furthermore, we should not overestimate the cooperation we might get from other countries. Presently, over 50 nations allow some form of gambling on line, and that number is likely to grow. And even if we're successful in getting cooperation from most countries, it would simply be increasing the profit opportunities for uncooperative countries, especially those with which the United States does not have diplomatic relations.
To be effective in prosecuting illegal gambling over the Internet, I think we have to prosecute individuals. This bill does not. If we took the approach in this bill in enforcing drug laws, we would be prosecuting the sellers but not the buyers. Prosecuting individuals in Internet gambling would be more effective than what we're seeing in illegal drug prosecutions, because the technology of the Internet would be in the Government's favor, since the activities of illegal gambling would leave a trail leading directly back to the individual gambler. So, so long as individuals can gamble over the Internet with impunity, a market will be provided for them which the regulatory scheme in this bill will not be able to stop.
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Since we are not talking about prohibiting Internet gambling but simply regulating it, I believe there is a more effective regulatory approach than offered by H.R. 21. However, the approaches must be developed taking into account the technology, State policies with respect to gambling, and Internet gambling practices and preferences.
This is the approach offered by H.R. 1223, the bill before us authored by Ranking Member of the full Committee, Mr. Conyers. That bill establishes a commission that would study the issue and make recommendations for a regulatory environment for Internet gambling which would be controlled by individual States. States do tend to prohibit individuals from gambling, so Internet gambling can be both effective and individualized in each State. Under the regulatory environment the bill provides for, if Nevada opts to allow Internet gambling within its borders, it can. If Utah does not opt to allow Internet gambling within its borders, it can prohibit it, and that would be enforceable by the Federal Government by the States that allow gambling, as well as by the State of Utah.
Under such a regulatory environment, it is much more likely that those who choose to gamble over the Internet will do so through a licensed regulated entity than one operating illegally. First, the consumer in a State where Internet gambling is legal will have confidence that, if they win, they will be paid. And in a licensed regulatory entity, such as MGM Mirage.com, we would not have to worry about the licensing authorities in Las Vegas failing to adopt stringent controls on access to its website. A consumer would have no similar confidence in a fly-by-night offshore casino.com, so a likely result from licensing and regulating Internet gaming activities would be to drive less reputable businesses out of business, particularly those that are offshore.
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Another significant result is, if States choose to authorize Internet gambling, it can tax it. At a time when unauthorized Internet gambling is flourishing, and when most States are cash-strapped, those States that already have chosen to authorize regulated gambling could receive much more needed revenues while contributing to the control of the industry and protecting the gambling public.
I believe that we should regulate Internet gambling, but we should do it effectively. We should not allow any single business sector with the sole responsibility for doing the bulk of the work of enforcement, whether it is the banking industry as in this bill, or the Internet service industry as we tried in prior bills. There are ways to regulate Internet gambling effectively, and the commission approach to develop those ways is the best way to come up with them.
Again, Mr. Chairman, I thank you for working with us on these two bills. I look forward to hearing the testimony of the witnesses, and I thank you for your birthday congratulations.
Mr. COBLE. You're indeed welcome. And you still don't know how I came into that knowledge. I rarely have him guessing, but I have him guessing now.
Folks, I believe members of the audience need to know something about our panelists, so I'm going to give brief introductory remarks prior to starting with Mr. Leach.
Our first witness is the sponsor of H.R. 21, Representative James Leach. Congressman Leach has been a Member of Congress for 26 years and represents the 2nd District in Iowa. During his tenure, Congressman Leach has invested a tremendous amount of time and effort on the issue of Internet gambling. The Subcommittee looks forward to his testimony on this complex issue.
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Our next witness is Mr. John G. Malcolm. Mr. Malcolm is currently a Deputy Assistant Attorney General in the Criminal Division of the Department of Justice, where his duties include overseeing the Computer Crime and Intellectual Property Section, the Child Exploitation and Obscenity Section, the Domestic Security Section, and the Office of Special Investigations.
He is an honors graduate of Columbia College and the Harvard School of Law. Mr. Malcolm served as a law clerk to Judges on both the United States District Court for the Northern District of Georgia, and the 11th Circuit Court of Appeals.
Our third witness is Mr. Jeffrey Modisett. Mr. Modisett is currently counsel for the law firm of Bryan Cave, LLP, in Los Angeles, CA, and has recently published articles concerning the States' approach to on-line gambling, cyber-law, and e-commerce.
An honors graduate of UCLA, Oxford University, and the Yale University School of Law, Mr. Modisett is also the former Indiana Attorney General. Mr. Modisett is the past president of the Family Advocacy Center, which he founded, and a former director of the National District Attorneys Association.
Our final witness this afternoon is Mr. William Hornbuckle. Mr. Hornbuckle is president and chief operating officer of MGM Mirage Online, and executive vice president of marketing for MGM Mirage. He is a 23 year veteran of the gaming industry and was promoted to his current position in July, 2001.
Mr. Hornbuckle has been serving as president and chief operating officer of the MGM Grand Hotel and Casino in Las Vegas since October, 1998. Prior to that role, he was executive vice president of operations for the resort.
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It's good to have all of you with us. We have written statements from each of the witnesses on the panel. I ask unanimous consent to submit them into the record in their entirety.
Gentlemen, as you all have previously been told, we try to adhere to the 5-minute rule here, both as to you all and to ourselves. So when that red light illuminates into your face, you will know that you're skating on thin ice. So if you could wrap it up then.
Mr. Leach, before you start, it's good to have you with us. I am a country bluegrass music aficionado, and Merle Haggard, who was known for years as the ''country balladeer'', once recorded a song entitled, ''The Kentucky Gambler.'' Has anyone in the audience ever heard of the song? Well, the concluding words in his song were these: ''...but a gambler loses much more than he wins.'' A sad story about a guy who abandoned his family because he was an addictive gambler.
So, having said that, Mr. Leach, it's good to have you and the other people with us. Fire away.
STATEMENT OF HONORABLE JAMES A. LEACH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA
Mr. LEACH. Thank you very much, Mr. Chairman, Mr. Scott, distinguished Committee counsel. Thank you for holding his hearing. Your leadership on this issue is deeply appreciated.
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As I have testified previously in this Committee, gambling on the Internet is fast becoming one of the critical issues confronting thousands of American families. The financial and economic implications of Internet gambling may not be intuitive to those unfamiliar with the workings of the industry, but the consequences cannot be exaggerated. It is simply not good for the economy at large, as well as each individual gambler, but the economy at large, to have Americans send billions to overseas Internet casinos which have shady or unknown owners.
Casino gambling, while it competes for jobs with other sectors of the economy, such as restaurants and the retail trade, also partly balances job losses elsewhere with some job creation. Internet gambling, on the other hand, may be the only sector of the economy where the case of greater efficiency is not altogether compelling. It reduces jobs in competing parts of the American economy, but creates few in itself and all, to date, are abroad. In other words, this is a ''jobs'' as well as a moral and regulatory issue.
The very characteristics that make the Internet such a valuable resource are also the reasons why it has such a huge potential to impinge on the stability of American financial institutions, as well as the American family. The easy access, anonymity, and speed of transactions which make such positive contributions to the level of efficiency and cost of financial services. also make routine safeguards impractical and leave the financial services industry open to abuse. Internet gambling increases consumer debt, makes bankruptcy more likely, money laundering an easy endeavor, and identity theft a likely burden.
Gambling, in general, and Internet gambling in particular, provide one of the most accessible platforms for money laundering. Money launderers tend to seek out areas where there is a low risk of detection by law enforcement. Internet gambling is a particularly attractive method to launder money because of the heightened level of anonymity and a virtual lack of governmental regulation. Nearly 80 percent of the $10 billion in revenue generated by Internet gambling sites is impossible to account for, since most operators are located in the Caribbean and other jurisdictions with loose regulatory structures and limited financial reporting requirements.
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Reports from the OECD's Financial Action Task Force specifically point to Internet gambling as a major loophole in anti-money laundering regimes. The U.S. Treasury's Financial Crimes Enforcement Network has a special anti-money laundering program designed for the traditional domestic gaming industry. No such strategy exists for illegal gambling sites located in unregulated offshore jurisdictions. Given the hard work of this Committee, and also that of the Financial Services Committee, to quash the money laundering efforts of terrorists and narco traffickers, it would be irresponsible to leave such an enormous institutional loophole unplugged.
Suggestions to legalize and regulate Internet gambling address none of these concerns. No regulatory system can prevent the social and economic ramifications of online gambling. This was the conclusion of the National Gambling Impact Study Commission report issued in 1999. This congressionally mandated report concluded that Internet gambling should be illegal at the Federal level and suggested prohibiting the use of financial instruments for these transactions, thus serving as a model for this legislation.
I stress this point, that we have had a national commission on gambling, that was congressionally mandated——
Mr. SCOTT. Jim, did you say it should be legal on the national basis, or illegal?
Mr. LEACH. No, no. Illegal.
Mr. SCOTT. Illegal?
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Mr. LEACH. Illegal. I'm sorry. I'm reading a little too quickly. I apologize.
Mr. SCOTT. No, I'm just listening too slowly.
Mr. LEACH. While it's true that one can have more formalized prohibitions—and I would certainly favor them—it is not necessarily the case that it is easy to get Congress to adopt bigger steps, so this bill is designed to accept the law, whatever this Committee determines to be, and then, using the Banking Committee's jurisdiction, come up with an approach which is basically functional regulation or a functional deterrent to whatever laws this Committee determines are appropriate.
I would simply stress that this is a functional ban. It is partly working today because, voluntarily, several of the major credit card companies have taken this direction as their own practice. We have already seen the Bear Stearns report that about half the Internet gambling profits have been reduced, and a number of companies are seeing some difficulties based on certain voluntary steps in this direction. So an assertion that there is no effectiveness defies the current partial steps that are being taken in the private sector.
In conclusion, let me stress that at a personal level I am a skeptic about all forms of gambling. But each of us are obligated to the maximum extent possible to be respectful of legitimate choices made by others. Casino gambling, as it exists in America, is at least regulated by the State to protect the participants. Generally, casinos also add entertainment and involve elements of socialization.
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Gambling alone, on the other hand, whether using a laptop at home or a computer in the workplace, involves no entertainment or socialization element, and lacks the fundamental protections of law and regulation. Casino gambling, as it has been sanctioned in all Western democracies, has only been allowed to exist with comprehensive regulation. Internet gambling lacks such safeguards. It is a danger to the family and society at large. It should be ended.
From a family perspective, the home may be considered a castle, but it should never be a casino.
Thank you all very much.
[The prepared statement of Mr. Leach follows:]
PREPARED STATEMENT OF THE HONORABLE JAMES A. LEACH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA
Mr. Chairman, thank you for holding this hearing on legislation addressing the epidemic problem of Internet gambling. Your leadership on this issue is deeply appreciated.
As I testified previously, gambling on the Internet is fast becoming one of the most critical issues confronting thousands of American families and the social and economic implications of Internet gambling can no longer be ignored. The ramifications of Internet gambling are now showing themselves on college campuses and even professional athletes have admitted addiction. Approximately 15 million Americans are at-risk or problem gamblers, who are more likely to have drug addictions, alcohol dependency, serious family dysfunction, and, at the extreme, especially when gambling losses accumulate, a higher rate of suicide.
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The financial and economic implications of Internet gambling may not be intuitive to those unfamiliar with the workings of the industry, but the consequences cannot be exaggerated.
It simply is not good for the economy at large to have Americans send billions to overseas Internet casinos which often have shady or unknown owners.
Casino gambling, while it competes for jobs with other sectors of the economy, such as restaurants and the retail trade, also partly balances job losses elsewhere with some job creation. Internet gambling, on the other hand, may be the only sector of the economy where the case of greater efficiency is not altogether compelling. It reduces jobs in competing parts of the American economy, but creates few in itself and all, to date, are abroad. In other words, this is a ''jobs'' as well as a moral and regulatory issue.
The very characteristics that make the Internet such a valuable resource are also the reasons why it has such a huge potential to impinge on the stability of American financial institutions, as well as the American family. The easy access, anonymity, and speed of transactions which make such positive contributions to the level of efficiency and cost of financial services also make routine safeguards impractical and leave the financial services industry open to abuse. Internet gambling increases consumer debt, makes bankruptcy more likely, money laundering an easy endeavor, and identity theft a likely burden.
Gambling in general and Internet gambling in particular provide one of the most accessible platforms for money laundering. Money launderers tend to seek out areas where there is a low risk of detection by law enforcement. Internet gambling is a particularly attractive method to launder money because of the heightened level of anonymity and a virtual lack of governmental regulation. Nearly 80 percent of the $10 billion in revenue generated by Internet gambling sites is impossible to account for, since most operators are located in the Caribbean and other jurisdiction with loose regulatory structures and limited financial reporting requirements.
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Reports from the OECD's Financial Action Task Force specifically point to Internet gambling as a major loophole in anti-money laundering regimes. The U.S. Treasury's Financial Crimes Enforcement Network has a special anti-money laundering program designed for the traditional domestic gaming industry. No such strategy exists for illegal gambling sites located in unregulated offshore jurisdictions. Given the hard work of this Committee, and also that of the Financial Services Committee, to quash the money laundering efforts of terrorists and narco-traffickers, it would be irresponsible to leave such an enormous institutional loop-hole unplugged.
Suggestions to legalize and regulate Internet gambling address none of these concerns. No Internet gambling site will subject themselves to taxation and the cost of regulation when they can remain offshore. And no regulatory system can prevent the social and economic ramifications of online gambling. This was the conclusion of the National Gambling Impact Study Commission Report issued in 1999. This congressionally mandated report concluded that Internet gambling should be illegal at the federal level and suggested prohibiting the use of financial instruments for these transactions, thus serving as a model for this legislation.
In conclusion, let me stress that at a personal level I am a skeptic about all forms of gambling, but each of us are obligated to the maximum extent possible to be respectful of legitimate choices made by others. Casino gambling as it exists in America is, at least, regulated by the State to protect the participants. Generally, casinos also add entertainment and involve elements of socialization. Gambling alone, on the other hand, whether using a laptop at home or a computer in the workplace, involves no entertainment or socialization element and lacks the fundamental protections of law and regulation. Casino gambling as it has been sanctioned in all Western democracies has only been allowed to exist with comprehensive regulation. Internet gambling lacks such safeguards. It is a danger to the family and society at large. It should be ended.
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From a family perspective, the home may be considered a castle; but it should never be a casino.
Thank you.
Mr. COBLE. Thank you, Mr. Leach.
We have been joined by the gentleman from Florida, Mr. Feeney, and Mr. Chabot, the gentleman from Ohio.
Mr. Malcolm.
STATEMENT OF JOHN G. MALCOLM, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. MALCOLM. Mr. Chairman, Members of the Subcommittee, thank you for inviting me to testify today. The issue before the Subcommittee is one of singular importance and I commend the Subcommittee for holding this hearing.
I would also like to commend Congressman Leach, as well as Congressman Goodlatte and Senator Kyl, for their tireless efforts and longstanding commitment to provide law enforcement with additional tools to combat Internet gambling. Today, I am pleased to offer the views of the Department of Justice about Internet gambling.
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As you all know, the number of Internet gambling sites has increased substantially in recent years. While there were approximately 700 Internet gambling sites in 1999, it is estimated that, by the end of 2003, there will be approximately 1,800 such sites, generating between $4.2 and $4.3 billion. In addition to online casino-style gambling sites, there are numerous offshore sports book operations that take bets both over the Internet and via the telephone. These developments are of great concern to the United States Department of Justice because of the potential for fraud, the opportunities they create for money launderers and organized criminal organizations, and the problems of gambling by minors and by compulsive gamblers, which are exacerbated by Internet gambling. I discuss each of these issues in greater detail in my written testimony.
Additionally, most of these gambling businesses operate offshore in foreign jurisdictions. Many of them accept bets from United States citizens, which is a violation of several Federal laws, including sections 1084, 1952 and 1955 of title 18, United States Code.
The Department of Justice generally supports the efforts of the drafters of H.R. 21, to enable law enforcement to cut off the transfer of funds to and from illegal Internet gambling businesses.
With respect to H.R. 1223, the Department has concerns about the feasibility and desirability of regulating Internet gambling. I have more extensive comments on H.R. 21 and H.R. 1223 in my written testimony. Of course, I am happy to answer any questions you may have about those bills.
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Before concluding, I would just like to thank you again for inviting me to testify today. The Justice Department also thanks you for your support over the years, and we reaffirm our commitment to work with Congress to address the significant issue of Internet gambling.
Thank you.
[The prepared statement of Mr. Malcolm follows:]
PREPARED STATEMENT OF JOHN G. MALCOLM
Mr. Chairman and Members of the Subcommittee:
Thank you for inviting me to testify today. The issue before this Subcommittee is one of singular importance, and I commend the Subcommittee for holding this hearing. I would also like to commend Congressman Leach, as well as Congressman Goodlatte and Senator Kyl, for their tireless efforts and longstanding commitment to provide law enforcement with additional tools to combat Internet gambling. Today I am pleased to offer the views of the Department of Justice about Internet gambling, including the potential for gambling by minors and compulsive gamblers, the potential for fraud and money laundering, the potential for infiltration by organized crime, and recent state actions. The Department of Justice generally supports the efforts of the drafters of H.R. 21 and S. 627 to enable law enforcement to cut off the transfer of funds to and from illegal Internet gambling businesses. With respect to H.R. 1223, the Department has concerns, which I shall address below, about the feasibility and desirability of regulating Internet gambling.
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As you all know, the number of Internet gambling sites has increased substantially in recent years. While there were approximately 700 Internet gambling sites in 1999, it is estimated that by the end of 2003, there will be approximately 1,800 such sites generating around $4.2 billion. In addition to on-line casino-style gambling sites, there are numerous off-shore sports books operations that take bets both over the Internet and via the telephone. These developments are of great concern to the United States Department of Justice, particularly because many of these operations are currently accepting bets from United States citizens, when it is illegal to do so.
The Internet and other emerging technologies, such as interactive television, have made possible types of gambling that were not feasible a few years ago. For example, a United States citizen can now, from his or her home at any hour of the day or night, participate in an interactive Internet poker game operated by a computer located in the Caribbean. Indeed, a tech-savvy gambler can route his bets through computers located in other countries, thereby obscuring the fact that he is placing his bet from the United States.
GAMBLING BY MINORS
On-line gambling also makes it far more difficult to prevent minors from gambling. Unlike traditional physical casinos and Off-Track-Betting parlors, the operators of gambling websites cannot look at their customers to assess their age and request photo identification. Currently, Internet gambling businesses have no reliable way of confirming that gamblers on their website are not minors who have gained access to a credit card. Although some companies are developing software to try to detect whether a player is old enough to gamble or whether that player is from a legal jurisdiction, such software has not been perfected and would, of course, be subject to the same types of flaws and vulnerabilities that could be exploited by hackers.
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COMPULSIVE GAMBLING
Unlike on-site gambling, on-line gambling is readily available to anyone with an Internet connection at all hours of the day or night. This presents a particular danger for compulsive gamblers. As was recently pointed out by the American Psychiatric Society: ''Internet gambling, unlike many other forms of gambling activity, is a solitary activity, which makes it even more dangerous; people can gamble uninterrupted and undetected for unlimited periods of time.'' Indeed, the problems associated with pathological and problem gamblers, a frighteningly-large percentage of which are young people, are well-established and can be measured in the ruined lives of both the gamblers themselves and their families.
POTENTIAL FOR FRAUD
Although there are certainly legitimate companies that either are operating or want to operate on-line casinos in an honest manner, the potential for fraud connected with casinos and bookmaking operations in the virtual world is far greater than in the physical realm. On-line casinos and bookmaking establishments operate in many countries where effective regulation and law enforcement is minimal or non-existent. Start-up costs are relatively low, and cheap servers and unsophisticated software are readily-available. Like scam telemarketing operations, on-line gambling establishments appear and disappear with regularity, collecting from losers and not paying winners, and with little fear of being apprehended and prosecuted.
Through slight alterations of the software, unscrupulous gambling operations can manipulate the odds in their favor, make unauthorized credit card charges to the accounts of unsuspecting gamblers, or alter their own accounts to skim money. There is also a danger that hackers can manipulate the online games in their favor or can steal credit card or other information about other gamblers using the site.
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POTENTIAL FOR ORGANIZED CRIME
Additionally, the Department of Justice is concerned about the potential involvement of organized crime in Internet gambling. Traditionally, gambling has been one of the staple activities in which organized crime has been involved, and many indictments brought against organized crime members have included gambling charges. We have now seen evidence that organized crime is moving into Internet gambling.
INTERNET GAMBLING VIOLATES FEDERAL LAW
Most of these gambling businesses operate offshore in foreign jurisdictions. If they are accepting bets or wagers from customers located in the United States, then these businesses are violating federal laws, including Sections 1084, 1952, and 1955 of Title 18, United States Code. While the United States can indict these companies or the individuals operating these companies, it may be difficult to bring them to trial in the United States.
MONEY LAUNDERING AND INTERNET GAMBLING
Another major concern that the Department of Justice has about on-line gambling is that such businesses provide criminals with an easy and excellent vehicle for money laundering. This is due in large part to the cash-intensive nature of the industry, the fact that most Internet gambling sites are located offshore, and the volume, speed, and international reach of Internet transactions.
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It is a fact that money launderers have to go to financial institutions to conceal their illegal funds and to recycle those funds back into the economy for their use. Because criminals are well aware of the fact that banks are now subject to greater scrutiny and regulation, they have—not surprisingly—turned to other non-bank financial institutions to launder their money. On-line casinos are a particularly inviting target because, in addition to using the gambling that on-line casinos offer as a way to hide or transfer money, on-line casinos offer a broad array of financial services to their customers, such as providing credit accounts, fund transmittal services, check cashing services, and currency exchange services.
Individuals wanting to launder ill-gotten gains through an on-line casino can do so in a variety of ways. For example, a customer could establish an account with a casino using illegally-derived proceeds, conduct a minimal amount of betting or engage in offsetting bets with an overseas confederate, and then request repayment from the casino, thereby providing a new ''source'' of the funds. If a gambler wants to transfer money to an inside source in the casino, who may be located in another country, he can just play until he loses the requisite amount. Similarly, if an insider wants to transfer money to the gambler, perhaps as payment for some illicit activity, he can rig the game so the bettor wins.
The anonymous nature of the Internet and the use of encryption make it difficult to trace the transactions. Further, the gambling business may not maintain the transaction records, in which case tracing may be impossible. While regulators in the United States can visit physical casinos, observe their operations, and examine their books and records to ensure compliance with regulations, this is far more difficult, if not impossible, with virtual casinos.
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COMMENTS ON H.R. 1223
If enacted, H.R. 1223 would establish a Commission to study the existing legal framework governing Internet gambling and the issues involved with the licensing and regulation of Internet gambling. Among the topics to be studied, the Commission would review existing law, assess the impact of Internet gambling on problem gamblers and minors, assess the susceptibility of Internet gambling to money laundering, and study the potential of regulatory measures to minimize any adverse problems. As I previously stated, the Department has concerns about these and other issues as they relate to Internet gambling. At this time, the Department believes that Internet gambling should be prohibited for many of the reasons I have mentioned, as well as others cited by the Congressionally-created National Gambling Impact Study Commission in its 1999 Report recommending that Internet gambling be prohibited. Moreover, given differences in state law on the issue of gambling in general, and given the fact that Internet gamblers could come from any state, the Department also has concerns that such regulation would need to ensure that the laws of all states were taken into consideration when analyzing this issue.
While the Department would not necessarily oppose per se a Commission that would revisit these issues and make recommendations on the feasibility of regulating Internet gambling, H.R. 1223 provides that this Commission shall issue proposed changes to Federal law and regulations to provide for the licensing and regulation of Internet gambling in the United States. This requirement appears to preordain the outcome of the Commission's study and not permit this Commission to reach the same conclusion that the National Gambling Impact Study Commission reached just four years ago, to wit, that Internet gambling be prohibited and not regulated.
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Our review of H.R. 1223 is continuing, and we may have additional comments at a later date. But if Congress elects to consider legislation, such as H.R. 1223, that could, in theory, eventually lead to the legalization of Internet gambling, it will be very important to bear in mind and emphasize the debilitating and potentially disastrous consequences of such a step that I noted previously—namely, the problems of underage gambling, addictive gambling, and fraud, as well as the possibility of organized crime involvement.
Even if H.R. 1223 is enacted, that should not preclude action on H.R. 21 and S. 627, since these bills apply only to ''unlawful Internet gambling'' and would not be applicable to lawful Internet gambling. Given that illegal gambling exists in the physical world despite the availability of legalized forms of gambling in many states, there is every reason to believe that unlawful gambling would continue to exist in the cyber world even if the United States were to regulate Internet gambling.
COMMENTS ON H.R. 21
The Department has several comments on H.R. 21. First, the Justice Department believes that H.R. 21 should apply to all means of wagering that derive from the Internet. Many offshore sports books accept wagers both over the telephone and over the Internet. As drafted, H.R. 21 is only applicable to Internet gambling, so an otherwise illegal site could avoid the bill's prohibitions by directing that wagers be placed over the phone rather than via the Internet. The bill should apply to all unlawful Internet gambling regardless of the communications medium being used to place bets.
Second, the Justice Department opposes provisions of H.R. 21 that weaken or alter existing federal law or standards. The Justice Department recognizes the important role that federal regulators play in regulating federally-insured financial institutions and is currently discussing with the Treasury Department procedures whereby injunctive relief would only be sought in full coordination with the appropriate federal financial regulator. Nonetheless, the Justice Department believes that Rule 65 of the Federal Rules of Civil Procedure should be the sole standard used by courts in considering whether to grant injunctive relief. Section 3(c)(5)(B) of H.R. 21 sets forth additional factors that the district court must consider in determining whether to grant injunctive relief against certain entities, including credit card issuers and financial institutions. Rule 65 is the well-established standard used in federal courts throughout the country in all cases in which a party is seeking injunctive relief, and the Department opposes any attempt to alter existing federal standards for the benefit of specific entities. Moreover, the Department believes that, under a standard Rule 65 analysis, a district court would already have the discretion to consider the listed factors.
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For the same reason, the Justice Department opposes Section 3(c)(4)(B) of H.R. 21, which provides, in essence, that interactive service providers that are not liable under H.R. 21 shall not be liable under Section 1084 of Title 18, United States Code, unless the ISP has actual knowledge of the bets and wagers and owns, controls, operates, manages, supervises, or directs a website at which unlawful bets or wagers are offered, placed, or received. This provision constructively amends Section 1084, an existing federal criminal statute, and weakens its application by imposing a far higher standard of liability than traditional aiding and abetting liability, which applies to everyone else who must comply with the law. While the Department does not believe that ISPs should be singled out for particularly harsh treatment (and our ''track record'' bears this out), we do not believe that ISPs should be singled out for uniquely favorable treatment either.
Third, the Justice Department has other concerns about how the bill treats ISPs, particularly as it pertains to the removal of Internet gambling websites and the cessation of ancillary services connected to those sites. We are, however, working diligently with representatives from several prominent interactive service providers.
CONCLUSION
On behalf of the Department of Justice, I want to thank you again for inviting me to testify today. We thank you for your support over the years and reaffirm our commitment to work with Congress to address the significant issue of Internet gambling. I will be happy to answer any questions that you might have.
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Mr. COBLE. Mr. Malcolm, your eyes weren't even close to being fixated. You finished well ahead of the red light and I commend you for that.
We have been joined by the gentlelady from Texas, Miss Jackson Lee. It's good to have you with us, Sheila.
Thank you, Mr. Malcolm.
Mr. Modisett, am I pronouncing your surname correctly?
Mr. MODISETT. You are, thank you.
Mr. COBLE. It's good to have you with us, Mr. Modisett.
STATEMENT OF JEFFREY MODISETT, COUNSEL, BRYAN CAVE, LLP, AND FORMER ATTORNEY GENERAL, STATE OF INDIANA
Mr. MODISETT. Thanks very much.
Mr. Chairman and Members of the Committee, thank you for the opportunity to testify today on this complex issue.
I have come to this issue today with both a law enforcement and technology background. As you noted, I have been a Federal prosecutor, a D.A., a State attorney general, but I have also worked in Silicon Valley and currently represent some high tech clients. The views I express today are my own.
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As Indiana Attorney General, I issued an official opinion on Internet gaming. In that opinion, I wrote that, under Indiana law, only gambling that is specifically authorized by statute is legal. Since there are no references to Internet gaming in the Indiana code, it's not legal.
But the question of whether the Federal Government should proactively attempt to prohibit all Internet gaming preemptively is a different question. My experience convinces me that the best antidote to an unregulated, offshore Internet gambling industry is a fully licensed, highly regulated, onshore Internet gambling industry based on strict American standards and priorities. I would further suggest that the enforcement mechanism proposed in H.R. 21, while well intended, is likely to be ineffective, counter-productive, and prone to unintended consequences.
H.R. 21 seeks to have the financial institutions operating in America prevent Americans from using financial instruments to place online wagers. I'm aware that one of the ostensible reasons for this effort is the fear that Internet gambling will provide an avenue for money laundering. Frankly, I find this assertion strange, given that the majority of Internet wagers are placed by credit cards, and credit card transactions are almost always transparent.
I don't believe that H.R. 21 will stop Americans from gambling on the Internet. I do believe it will change the manner in which they do so. If Internet gamblers cannot use their credit cards, many and perhaps most of them will instead opt for e-cash accounts, electronic fund transfers, wire transfers to accounts at offshore banks, and other less visible means to settle their accounts.
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It is impossible to predict, but none of the foregoing financial transactions are particularly difficult to execute. The added inconvenience might stop a few people who are rare or occasional bettors, but it won't stop experienced gamblers, including problem gamblers.
What the legislation will do, however, is potentially worsen the very problem it sets out to solve. To the extent that there's a potential for money laundering in the Internet gaming space—and the financial industry itself believes that this potential is small, according to the GAO—creating a market for less transparent payment solutions will presumably make illicit activities, including money laundering, substantially worse. Creating a market for blind e-cash is not the way to stop money laundering. The way to stop it is to make sure Internet gaming takes place in highly regulated, supervisory regimes.
I don't want American financial institutions to act as our police on the Internet. They will err on the side of over-inclusion and prohibit legal transactions out of an overabundance of caution, as they already have. We have not regulated Internet activity so directly before now, and now, at a time when the current law is unsettled, is not the time to begin.
Admittedly, the commission envisioned by H.R. 1223 would have a difficult job, but if it's achieved, the results would solve many of the problems that the prohibitionists sincerely want to solve. In a licensed environment, it is possible to verify identity online, using pin numbers and out-of-session contacts. This and other technology could be used to help ensure no minors gamble on the Internet.
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Because all Internet gaming transactions are recorded, it is actually easier to track problem gamblers in the cyber world than in the bricks and mortar casino. Self-exclusion and preset loss limits are more easily accomplished.
Another benefit would be economic. Instead of flowing offshore, the money wagered on the Internet would remain in the U.S. and help build the economies of the regulating States.
Mr. Chairman, when Evan Bayh became Governor of Indiana, he did not support gambling, but the people spoke and voted for a repeal of our constitutional ban on gambling. Governor Bayh concluded that if gambling was to be legal in Indiana, he would appoint people of unquestionable integrity and with law enforcement background to head up the regulatory effort. It worked. The Federal Government should also acknowledge now that Internet gaming will continue to grow in America, and we should appoint tough, fair-minded people with integrity to develop model approaches and help establish international standards for Internet gaming regulation.
In summary, Mr. Chairman, I don't believe the choice before the Subcommittee is whether or not there will be Internet gambling in the U.S. There will be. The question is what sort of Internet gambling there will be. Under H.R. 21, it will be an unlicensed, unregulated industry, where the Federal and State governments afford no protection, and with no economic benefit or tax revenue accruing to the U.S.
Under H.R. 1223, there is the potential for a tightly regulated industry, overseen by Americans of integrity, bolstered by laws and regulations that provide substantial protections for minors and problem gamblers, remove the potential for money laundering, and provide economic benefit and tax revenue in the U.S.
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Once again, thank you for the opportunity to testify. I look forward to the questions.
[The prepared statement of Mr. Modisett follows:]
PREPARED STATEMENT OF JEFFREY A. MODISETT
Mr. Chairman and members of the Committee, let me begin by thanking you for the opportunity to testify today on this complex issue.
It is difficult to discuss my opinion on the topics at issue today without putting it in the context of my personal experience and so, with your permission, I would like to briefly mention the more relevant part of my background.
Upon graduation from Yale Law School and following a clerkship with a federal judge, I began my career as an Assistant U.S. Attorney in Los Angeles. In time, I became the Deputy Chief of the Public Corruption and Government Fraud Unit, specializing in the prosecution of violations of the U.S. Export Control laws. In 1988, I returned to my home state of Indiana to work for Evan Bayh (now Senator Bayh), first on his successful gubernatorial campaign and then as his Executive Assistant for Public Safety. In this capacity, I served as Governor Bayh's liaison to the State Police, Department of Correction, and National Guard, as well as headed up the state's efforts in the war on drugs. In 1990, I was elected Prosecuting Attorney for Marion County, Indiana, which is the City of Indianapolis. In 1996, I was elected state attorney general.
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As attorney general, I issued official opinions, including one on Internet gaming. That Official Opinion, by the way, concluded that Internet gaming is illegal in Indiana. At the Governor's request, I also chaired the state's Gambling Impact Study Commission. The Commission met for two years and issued a lengthy report in December 1999.
Today, the committee has before it two bills, H.R. 21 and H.R. 1223, which pursue two very different approaches to Internet gambling. To oversimplify, H.R. 21 seeks to enforce a prohibition on Internet gambling, while H.R. 1223 seeks to create a commission to determine how states and the federal government might work together to license and regulate Internet gaming. Personally, I believe that H.R. 21 has great surface appeal, especially (of course) for those who oppose gambling in all forms. However, it is my opinion that H.R. 1223 is the preferable approach; the reasons for this will be the focus of my testimony.
Internet gambling raises many thorny issues. There are the social, fiscal, and economic impacts of all legalized gambling—which were the focus of our two-year study in Indiana. There is a question of political philosophy, that is, how much should the government do to protect people from themselves, and to what extent the freedoms of the many should be restricted to protect the vulnerabilities of the few. There is the perplexing question of how to apply the varying state and federal laws and regulations to transactions that are trans-jurisdictional by their very nature. Finally, there are more nuanced questions about the differences among sportsbook, casino-style, lottery, pari-mutuel and other forms of gaming, and how the law should treat each of these.
In dealing with all of these things, there are a few points upon which I believe we all agree. I believe we all seek to minimize the adverse consequences that can accompany gambling—we must do all we can to prevent gambling by minors, we must be vigilant to identify pathological gambling and have the tools and resources for dealing with it when we find it, and we must investigate the potential for money laundering. I also think we all agree that most Americans today have the option to gamble if they so choose—only three states prohibit all gambling, and even in those states, illegal gambling is an option. There is no legal sports betting outside of Nevada, and yet there is plenty of sports betting across the country. And, I think we can all agree that Americans who want to gamble on the Internet are almost certainly going to be able to do so—they can today, and they will be able to do so in the future. Unless the federal government wants to take draconian steps that would adversely affect both the Internet and personal privacy, people who want to bet on the Internet will be able to do so.
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As I mentioned earlier, as Indiana Attorney General, I issued an Official Opinion, which still has precedential authority in Indiana. In that Opinion, I wrote that under Indiana law only gambling that is specifically authorized by statute is legal. Since there are no references to Internet gaming in the Indiana Code, it is not legal—even though gambling on riverboats, on horse races, and by lotteries are explicitly permitted in some fashion. I also warned in that Opinion that many Hoosiers were likely gambling over the Internet anyway, and that therefore parents especially should be mindful of how easy it is to gamble on-line. This Opinion was widely interpreted as calling prospectively for the outright prohibition of gambling on the Internet, which was not accurate. As attorney general, I had an obligation to advise my constituents on Indiana law as it then existed. But my Opinion, as reinforced by my service on the state Gambling Impact Study Commission and other experiences, was and is more complicated and nuanced than the position advanced by the prohibitionists.
I submit that the best antidote to an unregulated offshore Internet gambling industry is a fully-licensed, highly-regulated on-shore Internet gambling industry based on strict American standards and priorities. I would further suggest that the enforcement mechanism proposed in Congressman Leach's bill—while well-intended—is likely to be ineffective, counter-productive, and prone to unintended consequences.
PROBLEMS WITH THE LEACH BILL
H.R. 21 seeks to have the financial institutions operating in America prevent Americans from using financial instruments to place on-line wagers. It would have the Department of the Treasury adopt regulations aimed at blocking such wagers, and would empower state and local law enforcement to seek injunctions to require financial institutions to take additional enforcement steps.
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I am aware that one of the ostensible reasons for this effort is a fear that Internet gambling will provide an avenue for money laundering. Frankly, I find this assertion strange, given that the majority of Internet wagers are placed by credit cards, and credit card transactions are almost always transparent. I do not believe that the Leach bill will stop Americans from gambling on the Internet; however, I do believe it will change the manner in which they do so.
If Internet gamblers cannot use their credit cards, many (perhaps most) of them will instead opt for e-cash accounts, electronic funds transfers, wire transfers to accounts at offshore banks, and other less visible means to settle their accounts. Presumably, the bills' sponsors proceed from the assumption that added inconvenience will dissuade many or most gamblers from betting on-line. It is impossible to predict, but none of the foregoing financial transactions are particularly difficult to execute. The added inconvenience might stop a few people who are rare or only occasional bettors. But it will certainly not stop experienced gamblers, including problem gamblers.
What this legislation will do, however, is potentially worsen the very problem that it sets out to solve. To the extent that there is a potential for money laundering in the Internet gaming space, creating a market for less transparent payment solutions will presumably make illicit activities, including money laundering, substantially worse. The obvious response to the Leach bill by the offshore industry will be to create payment solutions that U.S. law enforcement and U.S. banks cannot easily ''see''—that is, their transactions will be harder to trace. Creating a market for blind e-cash is not the way to stop money laundering.
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SOLUTIONS IN THE CONYERS BILL
Admittedly, the commission envisioned by H.R. 1223 would have a difficult job. The members would have to determine how best to preserve state prerogatives in an Interstate medium. They would have to provide guidance on which regulations will keep minors and pathological gamblers from betting on-line, at least affording the same level of protections as exist in land-based casinos. The would have to recommend means to protect against money laundering. They would have to ensure the fairness of games and ensure that winnings are paid out. Finally, they would have to figure out how to appropriately tax the proceeds of Internet wagers.
But if this is achieved, the results would solve many of the problems that the prohibitionists sincerely want to solve. In a licensed environment, it is possible to verify identity on-line using PIN numbers and out-of-session contacts. This and other technology could be used to help ensure no minors gamble on the Internet. Because all Internet gaming transactions are recorded, it is actually easier to track problem gamblers in the cyberworld than in a brick-and-mortar casino. Self-exclusion and pre-set loss limits are more easily accomplished.
Another benefit would be economic—instead of flowing offshore, the money wagered on the Internet would remain in the U.S. and help build the economies of the regulating states. One may oppose gambling for various reasons, but it is undeniable that local economies have benefited from gambling and state and local governments have gained revenues from it. States could also collect taxes on Internet gambling that they are losing today (from both casinos and bettors); this would help with the substantial budget shortfalls most states now face. I would not propose Internet gaming as a way of fixing state deficits, but I would suggest that the revenue generated from American bettors in cyberspace should help the United States and not Netherland Antilles or the Grand Cayman Islands.
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I should be clear: I most certainly am not an advocate of H.R. 1223 for economic reasons. I think there are better ways for government to improve people's lives economically. But I do think it is short-sighted to think that we can have any significant impact on such a huge industry as Internet gaming by convincing ourselves that we can stop offshore cybergaming at the border. Instead, and most importantly, we should minimize and marginalize the offshore Internet gaming industry by developing a fully-licensed, highly-regulated industry in the U.S. We should use the marketplace to ''suck all of the oxygen'' out of the offshore industry. U.S. customers prefer U.S. brands and U.S. companies would quickly dominate the market. In terms of the U.S. market, much of the offshore industry would probably give up entirely and shift their focus from the U.S. to other countries where they might have a better chance of competing successfully. In the meantime, U.S. companies would set the standard for fairness and honesty because they would be operating under a fully transparent regulatory regime.
In fact, dozens of countries have already begun the process of licensing and regulating Internet gambling—most notably the United Kingdom. The U.K.'s licensing and regulation regime will be complete soon, and Australia, Denmark and other countries have legalized it as well. We can benefit from their learning process and improve upon it.
Mr. Chairman, when Evan Bayh became Governor of Indiana in 1989, he did not support gambling, but the people spoke and voted for a repeal of our Constitutional ban on gambling. Soon, lawmakers passed a state lottery followed by riverboat gambling. Governor Bayh concluded that if gambling was to be legal in Indiana, he would appoint people of unquestionable integrity to head up the regulatory effort. He appointed a federal prosecutor as the Executive Director of the state gaming commission and the commission passed tough regulations and made clear from the outset that tough enforcement would be used against any law violators. As a result, we had a remarkably clean operation from Day One. The federal government should also acknowledge now that Internet gaming will continue to grow in America and we should appoint tough, fair-minded people with integrity to develop model approaches and help establish international standards for Internet gaming regulation.
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In summary, I do not believe that the choice before this subcommittee is whether or not there will be Internet gambling in the U.S.—there most certainly will be. The question is what sort of Internet gambling there will be. Under H.R. 21, it will be an unlicensed, unregulated industry where the federal and state governments afford no protection to players, to minors or to problem gamblers, and it will be funded by less-than-transparent transactions, with no economic benefit or tax revenue accruing to the U.S. Under H.R. 1223, there is the potential for a tightly-regulated industry overseen by Americans of integrity bolstered by laws and regulations that provide substantial protections for minors and problem gamblers, remove any potential for money laundering, and provide economic benefit and tax revenue in the United States.
Once again, I thank you for the opportunity to testify, and I look forward to the question and answer session.
Mr. COBLE. Thank you, Mr. Modisett. I appreciate that.
Mr. Hornbuckle.
STATEMENT OF WILLIAM J. HORNBUCKLE, PRESIDENT AND CHIEF OPERATING OFFICER, MGM MIRAGE ONLINE
Mr. HORNBUCKLE. Thank you, Mr. Chairman.
Mr. Chairman, distinguished Members of the Committee, thank you for inviting me today to testify about the MGM MIRAGE position on Internet gaming.
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I am Bill Hornbuckle, President and Chief Operating Officer of MGM MIRAGE Online, a wholly owned subsidiary of MGM MIRAGE, with head offices in the Isle of Man and Las Vegas, NV.
MGM MIRAGE is one of the world's leading and most respected entertainment, hotel, and gaming companies that owns and operates 15 casino resorts located in Nevada, Mississippi, and Michigan. We employ more than 43,000 men and women, we manage $10 billion in assets, and generate over $4 billion in revenue annually.
Since all of our casinos operate under privileged gaming licenses, we clearly understood what was at stake for our company and the industry when we decided to pursue online gaming and seek the appropriate licensing. In September of 2001, MGM MIRAGE was awarded one of three online gaming licenses from the Isle of Man. Our site went live in September of 2002 and has been accepting wagers from a small number of Western European countries.
I am here to testify today in opposition of H.R. 21. Given the need to be brief, and the extensive nature of this subject, I have made an additional submission of supplemental material that cover the interactive gaming market, operations, regulations, and anti-money laundering code that govern our activity. While this material is voluminous—and I do apologize for that—I thought it important to share with all stakeholders before any legislation was passed.
My message today centers around the following three basic premises:
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Premise one. H.R. 21 will not stop Internet gaming in the United States. We strongly suggest that prohibition in the United States has a long list of failures associated with it. Any attempt of prohibiting activity on the Internet, gaming or otherwise, will unfortunately suffer a similar fate. We see this activity as ubiquitous and impossible to control from an end-user perspective, with long-term attempts to do so as futile.
The commercial reality in the United States is that every major financial institution has ceased taking credit and debit card transactions for online gaming. Despite the banking industry's preemptive move last spring, the recent General Accounting Office report stated that the online gaming industry would grow to $4.2 billion in 2003, at a growth rate of 20 percent. Nothing proposed in H.R. 21 will stop that growth. This bill will have limited impact on a very resilient industry.
Bets from America are prohibited on the MGM MIRAGE site; yet, without any promotion, more than 60 percent of all registration attempts are from U.S. citizens, none of which have made it through our rigorous player protection system. America is playing online. They are now simply doing it offshore in unregulated markets.
Premise number two: the law of unintended consequences of H.R. 21 is in direct contrast with the things it seeks to stop. The bill would push offshore all regulatory and probity issues of a product that is a click away from 110 million Internet users in America. H.R. 21 will do nothing to protect these consumers.
State gaming regulatory bodies and Federal law enforcement agencies, which have been effective in the past in controlling gaming, will be prevented from regulating an activity that remains a click away. Further, by eliminating all regulated and credible financial institutions, you have encouraged an e-commerce market that is ripe for money laundering.
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Premise three: you can properly regulate online gaming. Unlike just a couple of years ago, the tools and business methodology exist today to effectively regulate this industry. The support material we have provided highlights that the four key issues most commonly associated with online gaming—jurisdictional control, age verification, responsible gaming, and money laundering—can be properly administered.
Although no singular technology solution is perfect, MGM MIRAGE, through our geo-verification module, has been able to leverage database queries on customer location, residence, age and fraud detection. After several thousand registration trials and numerous attempts by regulators through State controlled testing labs, we believe we have successfully blocked all inquiries from nonviable jurisdictions and users who are underage.
We urge you to consider the merits of H.R. 1223, which calls for an Internet Gambling Licensing and Regulatory Study Commission. Only through research and study can sound and effective legislation be drafted, passed and enforced. In order to determine the best way to protect the public's interest, we are strongly suggesting that further study needs to be completed on this complex subject before any law is enacted upon.
The public, which clearly enjoys this activity, is deserving of proper protections from operators who are held only to the highest standards. The debate should not center on how do we prohibit online gaming, but rather, now that online gaming is in American homes to stay, how do we effectively regulate and control it. This activity simply cannot be legislated away.
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Again, I thank you for allowing me to testify. I would be pleased to answer any questions you may have on this matter today or in the future.
[The prepared statement of Mr. Hornbuckle follows:]
PREPARED STATEMENT OF WILLIAM J. HORNBUCKLE
Mr. Chairman, distinguished members of the Committee, thank you for inviting me to testify today about the MGM MIRAGE position on Internet gaming.
I am Bill Hornbuckle, President and Chief Operating Officer of MGM MIRAGE Online, a wholly owned subsidiary of MGM MIRAGE, with head offices in the Isle of Man and Las Vegas, Nevada.
MGM MIRAGE is one of the world's leading and most respected entertainment, hotel, and gaming companies that owns and operates 15 casino resorts located in Nevada, Mississippi, and Michigan. We employee more than 43,000 men and women, manage 10 billion dollars in assets and generate over 4 billion dollars in operating revenues annually.
Since all of our casinos operate under privileged gaming licenses, we clearly understood what was at stake for our company and the industry when we decided to pursue online gaming and seek appropriate licensing. In September of 2001, MGM MIRAGE was awarded one of the first three online gaming licenses from the Isle of Man. Our site went live in September of 2002 and has been accepting wagers from a small number of Western European countries.
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I am here to testify today in opposition of H.R. 21.
Given the need to be brief and the extensive nature of this subject, I have made an additional submission of supplemental material that cover the interactive gaming market, operations, regulations, and anti-money laundering code that govern our activity. While this material is voluminous, I thought it important to share with all stakeholders before any legislation was passed.
My message today centers around the following three basic premises:
Premise 1. H.R. 21 will not stop Internet gaming in the United States.
We strongly suggest that prohibition in the United States has a long list of failures associated with it. Any attempt of prohibiting activity on the Internet, gaming or otherwise will unfortunately suffer a similar fate.
We see this activity as ubiquitous and impossible to control from end-user perspective, with long-term attempts to do so as futile.
The commercial reality in the United States is that every major financial institution has ceased taking credit and debit card transaction for online gaming. Despite the banking industry's preemptive move last spring, the recent General Accounting Office report stated that the online gaming industry would continue to grow to 4.2 billion dollars in 2003 at a growth rate of 20 percent.
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Nothing proposed in H.R. 21 will stop that growth. This bill will have limited impact on a very resilient industry.
Bets from America are prohibited on the MGM MIRAGE site, yet without any promotion more than 60 percent of all registration attempts are from U.S. citizens.
America is playing online; they are now simply doing it offshore in unregulated markets.
Premise 2. The law of unintended consequences of H.R. 21 is in direct contrast with the things it seeks to stop.
The bill would push offshore all regulatory and probity issues of a product that is a click away from 110 million Internet users in America. H.R. 21 will do nothing to protect these consumers.
State gaming regulatory bodies and federal law enforcement agencies, which have been effective in the past in controlling gaming will be eliminated from regulating an activity that remains a click away.
Further, by eliminating all regulated and credible financial institutions, you have encouraged an e-commerce market that is ripe for money laundering.
Premise 3. You can properly regulate online gaming.
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The tools and business methodology exist today to regulate this industry. The support material we have provided highlights that the four key issues most commonly associated with online gaming; jurisdictional control, age verification, responsible gaming, and money laundering can be properly administered.
Although no singular technology solution is perfect, MGM MIRAGE through our geo-verification module has been able to leverage database queries on customer location, residence, age and fraud detection. After several thousand registration trials and numerous attempts by regulators through state controlled testing labs, we believe we have successfully blocked all inquiries from non-viable jurisdictions and users who are underage.
We urge you to consider the merits of H.R. 1223, which calls for an Internet Gambling Licensing and Regulatory Study Commission. Only through research and study can sound and effective legislation be drafted, passed, and enforced.
We are strongly suggesting today that further study needs to be completed on this complex subject before any law is enacted upon.
The debate, should not center on how do we prohibit online gaming, but rather now that online gaming is in American homes to stay, how do we effectively regulate and control it.
This activity simply cannot be legislated away.
Thank you again for allowing me to testify today. I again would encourage you to review the material submitted. I would be pleased to answer any questions you may have on this matter today or in the future.
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Mr. COBLE. Gentlemen, the Members of the Subcommittee thank you, express our thanks to each of you, for this contribution. Let me start with Mr. Malcolm.
Mr. Malcolm, some have said that the way H.R. 21 is drafted, it could be interpreted as a weakening of the Wire Act. Do you agree with this statement (a), and could you give us an example of how this could weaken that statute?
Mr. MALCOLM. Certainly, Mr. Chairman.
It weakens it in a couple of rather subtle ways. The main one perhaps deals with section 3(c)(4)(B) of the bill, which I would contend presents a carve out for Internet service providers for liability under section 1084. That section essentially says that before an ISP can be held liable under the Wire Act, one must prove a violation of this law and, in addition to that, one would have to prove that the ISP not only had knowledge of the bets or wagers being placed, but in addition to that, also had to own, operate or control the gambling website in question.
That increases the quantum of proof that the Government would have to offer against an ISP under 1084, well above that which would be established under an aiding and abetting theory. For example, if an ISP were taking money for advertising for an Internet gambling site, clearly connecting supply and demand, with knowledge that that is what they were doing, even if you put the ISP on notice, and even though they were clearly facilitating this gambling activity, they would not longer violate 1084. They would say well, we have knowledge of the bet or wager, but we don't own, control or supervise the Internet gambling website. Therefore, they would be carved out of 1084.
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There are some other brief anomalies dealing with the definitional sections between this section and 1084, but we can deal with the staff on that.
Mr. COBLE. All right. Thank you, Mr. Malcolm.
Mr. Hornbuckle, I have been asked by my colleague from Utah, Mr. Cannon, to ask this question that is peculiar to his State of Utah.
Utah law prohibits gambling. Could you technologically prevent people in Utah from gambling on the Internet? If so, how would you do that?
Mr. HORNBUCKLE. Mr. Chairman, yes, we could.
When we went forward with licensing, as you know, we're privilege licensed in the States I mentioned earlier. Nevada, of note, where most of our assets reside, made us commit to and we created technology that, if a country has made gambling illegal, or specifically made Internet gambling illegal—and I'll use the case of Japan, where gambling is illegal, and Hong Kong, where Internet gambling is illegal—we have put forth in our system through IP blocking and other methodologies, which are laid out here, a system that says ''no, you cannot get in''. It has been 99.9 percent effective in doing that.
No system is perfect, but we can deliver with reasonable assurance to the Congressman that the folks from Utah, if he didn't want them in, wouldn't be put in.
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Mr. COBLE. All right. I'll convey that to him.
Mr. HORNBUCKLE. Thank you.
Mr. COBLE. Mr. Leach, we know that you have been involved in this issue for a long time. Some believe that Internet gambling should be licensed and regulated rather than prohibited, as we have heard today. Can you tell us, based upon your years of investigating this issue, whether or not licensing and regulating is a realistic alternative to prohibition, and why?
Mr. LEACH. Well, certainly you can license and regulate. The question is, is it good for the country? Is it good for the individuals involved? I think, when you go to the individual, you have this dilemma of do you want to turn the home into a casino, where there is virtually no constraints, particularly in people that appear, as has been described by the medical profession, in an almost quasi-genetic way, where one-and-a-half to 2 percent of Americans, once they start to gamble, it's pretty hard to stop. You have working in the home less constraints than you would have in going to an actual casino. I think you would open that problem up rather dramatically. In addition, you keep all the social problems that currently exist, with a single positive of—you have to recognize that there is good and bad to almost any proposal, where you would probably bring a little more gambling onshore. But if one has real doubts about the individual and social implications of Internet gambling, then I don't think that would be a wise way to go.
I would make one final comment, because it relates to the very thoughtful testimony of someone who has a different judgment than mine from MGM. When they say there's no consumer protection, the ultimate consumer protection is that the consumer will not have to pay an Internet gambling debt if he cannot use a financial instrument. So the lack of ability of a casino that's on the Internet to take the losses, which are virtually assured over any period of time, will protect the American consumer maximally.
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Mr. COBLE. Thank you, sir. I see that my time has expired.
The gentleman from Virginia.
Mr. SCOTT. I had one technical question. On page 6 of the bill, Mr. Malcolm, of H.R. 21, line 15, it says that one of the things it exempts is ''any lawful transaction with a business licensed or authorized by a State.''
Does that exempt lotteries? It's page 6, line 15.
Mr. MALCOLM. If I may have just a moment. [Examining.] Absolutely, Mr. Scott.
Mr. SCOTT. Okay.
Mr. Malcolm, you indicated that there ar 1,800 sites now. Are those 1,800 accessible from the United States that you're talking about?
Mr. MALCOLM. Well, it's possible there are a handful of sites, such as Mr. Hornbuckle's site for the MGM MIRAGE, where they may be able to successfully block access to the United States. But by and large, the Internet is an open territory where one can route computer communications through any country. I would think that, with a little ingenuity by a tech-savvy person, yep, they would all be available.
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Mr. SCOTT. Mr. Hornbuckle, you said you could block out a Utah address. If someone calls a long distance number to kind of log in, how would you know they were physically in Utah and not in Nevada?
Mr. HORNBUCKLE. Through IP mapping, through a product we use called QUOVA, you can not only identify the origin, you can tell if they're using an anonomizer. It's a layered weighted system that tells you if it's direct or dial up.
Based on those indicators and other things that layer into the approach we take, in terms of banking institutions, address, voter registrar, you know, we go back and check data queries and we can determine with reasonable assurance where they're coming from.
Mr. SCOTT. You can verify the residence of the name of the person the account is in?
Mr. HORNBUCKLE. That's correct.
Mr. SCOTT. You would have no way of knowing whether or not that named person is, in fact, the one doing the gambling?
Mr. HORNBUCKLE. That's correct, other than there is a pin code that goes back to the customer through the regular mail. To the extent they have that pin code, that's the identification we have on the other end.
Mr. SCOTT. How do you deal with responsible gaming?
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Mr. HORNBUCKLE. There is a player protection module on our site, which I have identified and laid out in great detail in the material we have submitted. It enables a potential customer to go online and limit their stake activity in terms of time, amount wagered, deposits, or withdrawals for that matter. It's a device that enables them to monitor what their own play activity is, as well as we can monitor it if we choose to.
Mr. SCOTT. Mr. Malcolm, are gambling debts enforceable under this bill? I know in Virginia, at least the law used to be that you couldn't legally collect a gambling debt. Would this scheme affect any of that?
Mr. MALCOLM. Under H.R. 21, there are civil remedies, including the ability to essentially freeze an account to prevent any financial activity going to and from that operation. If you're asking as a matter of civil law whether you can collect on a gambling debt, generally one can't collect on unenforceable or illegal contracts. But, you know, that's not my area of expertise particularly.
Mr. SCOTT. Mr. Modisett, you indicated ways of evading this H.R. 21. Could you go into a little more detail about that? You mentioned wire to an offshore bank, escrow accounts, I assume long-distance calls into an Internet provider, and using an access number in Canada would be another way?
Mr. MODISETT. Yes. Actually, you're listing all of them there as an example, the point being that you want transparency to be able to follow these transactions. Credit cards are one of the best ways to have that sort of transparency. So when you start closing down that aspect of the financial transaction, like the balloon, it's going to spread out into other areas. They will find ways to go ahead and gamble. Those other ways that you cited will be less transparent and more difficult to follow, and to the extent there is a potential for abuse, my concern is that that is going to worsen the problem rather than make it better.
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Mr. SCOTT. Mr. Hornbuckle, who regulates your site to make sure that the odds that people think they're playing against are, in fact, the odds?
Mr. HORNBUCKLE. The actual licensing is with the Isle of Man government, but we also have made submissions of our license in our games to the other jurisdictions that we operate in—Mississippi, Nevada, New Jersey and...I'm missing one.
Mr. SCOTT. Who gets the tax benefit on the profits?
Mr. HORNBUCKLE. The Isle of Man government.
Mr. SCOTT. Does the United States get any benefit from that?
Mr. HORNBUCKLE. No, they do not, because we do not accept U.S. wagers at this time.
Mr. COBLE. Mr. Hornbuckle, I didn't hear the last thing you said to Mr. Scott.
Mr. HORNBUCKLE. I'm sorry. No, they do not. He asked if the U.S. was any beneficiary from taxes, and the answer is no, nor are other jurisdictions, other than the Isle of Man, because we do not take U.S. bets at this time.
Mr. COBLE. Very well. Thank you.
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Mr. Feeney, the gentleman from Florida. Were you through, Bobby?
Mr. SCOTT. Yes, thank you.
Mr. FEENEY. Thank you, Mr. Chairman.
Mr. Hornbuckle, do you have any estimates, either your company or the industry, do you have any estimates of what percentage of Internet gambling is run through companies like yours, that have submitted their odds that Mr. Scott asked about, for example, to Mississippi, New Jersey and Nevada, and what percentage is completely unregulated at the present time?
Mr. HORNBUCKLE. I would suggest to you that all operators, where they have their jurisdiction and licensing regimes, would tell you that they're regulated. So I think it's a matter of what you would consider regulation.
What we go through in the Isle of Man and what ultimately holds us to our standard based in Nevada and all that we have at stake, is a different bar and a bar we all ought to get to, and potentially what happens in a Caribbean country. But they would tell you that they are regulated. Our games are out there, registered with the Isle of Man government, within certain standards that they call out, and we have to adhere to those standards.
Mr. FEENEY. What you have suggested without saying it is that some of your competitors may not have the integrity that MGM does. I guess my question would be, what percentage of the Internet gambling today is with less credible entities than MGM, in your opinion?
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Mr. HORNBUCKLE. With all due respect, sir, I would like to hold comment on that. [Laughter.]
I couldn't accurately give that estimation anyhow.
Mr. FEENEY. Maybe Mr. Malcolm has an opinion about that.
Mr. MALCOLM. My guess, Mr. Feeney, would be that a whole bunch of them are less scrupulous and less honorable than MGM MIRAGE.
Mr. FEENEY. Assuming that most consumers in America are reasonably wise, that would suggest the addictive tendencies of Internet gamblers to me, anyway, because to the extent that I want to be entertained for a reasonable value for my buck and I want some reasonable odds in return, I'm probably going to pursue regulated places to gamble, where I can be assured of a fair square deal, even though I understand it's ultimately in the house's advantage.
Isn't this suggestive that Internet gamblers behaviorally, Mr. Hornbuckle, may tend to be more addictive and less responsible gamblers?
Mr. HORNBUCKLE. I don't know that it suggests it's more addictive. I will tell you that the commercialities of odds and what goes on in the Internet world at large are such that, to be competitive and to survive, nobody is taking huge advantage of customers out there, or they won't.
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Gamblers are savvy, particularly the ones that are on line. To the extent they then ultimately get compensated for their wagers and their winnings, if they have some—and they do have some—I think speaks to the credibility of who the operator is. That's where you get into issues of are they licensed, are they credible, is a brand like MGM MIRAGE meaningful or not. That's something that would ultimately be up to the general public to decide.
Mr. FEENEY. I would like to ask my colleague, Congressman Leach, if he has an opinion about the elasticity of demand for gambling as it relates to Internet opportunities
Our staff estimates that, in the last 10 years, we have had roughly a ten-fold increase in American dollars wagered over the Internet. I would like to ask my colleague if he's got an opinion. Does that come at the expense of gambling on things like lotteries, regulated casinos, gambling ships, penny ante games and office pools, or is this increase likely to be in addition to all the above? Not to mention pork belly futures on the mercantile market.
Mr. LEACH. Well, I'm not an expert. Frankly, the competitive aspect would be better asked of someone from MGM that would know that better than I.
I would say there are two things that stand out. One is the terrific growth in the Internet. Clearly, there is some competition with casino gambling. How big that is, I don't know.
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Secondly, the fact is that there are lots of studies of the gambling issue, per se. Your National Commission on Gambling went into some of this, which shows that there is part of America that really does get hooked in analogous ways to alcohol or drugs, and then some correlation between the two. That is, if one is likely to be hooked on a drug or alcohol addition, one is as little more likely to be an addictive gambler. But the key thing is, one can quite quickly and rapidly lose a great deal.
Certainly there is a case, as MGM has made, that it would be better if you were to deal with a reputable company versus less reputable. But I think the more compelling case is to deal with nobody.
I would defy anyone on this panel to give me a strong social case for Internet gambling. I mean, what is it? Is there a national interest case for it? Is there an individual family case for it? And then to think in reverse terms, are there some disadvantages to the country, some disadvantages to the individual? I think it gets pretty compelling.
Mr. COBLE. The gentleman's time has expired.
The gentlelady from Texas.
Ms. JACKSON LEE. Thank you very much, Mr. Chairman. I would ask unanimous consent that my opening statement be allowed to be submitted in the record.
Mr. COBLE. Without objection.
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[The prepared statement of Ms. Jackson Lee follows:]
PREPARED STATEMENT OF THE HONORABLE SHEILA JACKSON LEE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TEXAS
I would like to thank Chairman Coble and Ranking Member Scott for convening this very important hearing today.
We are here today to hear testimony and discuss two bills related to Internet gambling—H.R. 21 and H.R. 1223.
There have been attempts in the last two Congresses to outlaw internet gambling, or in the alternative to restrict internet gambling such as restricting how bets are made. The bills we are considering today are continuation of those prior efforts.
H.R. 21 prohibits internet gambling businesses from accepting bets from credit cards, electronic fund transfers, money transmitting business transfers, and instruments or transactions drawn through financial institutions. It also grants Federal district courts jurisdiction over violations of bill, requires the Secretary of the Treasury to prescribe regulations on payment systems and policies to prevent restricted transactions, and calls for U.S. and foreign governments to cooperate to prevent money laundering and other crimes.
The issue of internet gambling is always debated vigorously. The Internet gambling industry receives wagers amounting to an estimated $4.2 billion dollars per year through 1,800 internet gambling sites. Internet gambling has a high likelihood of causing personal bankruptcy, provides a fertile ground for fraud and money laundering, is difficult for states to regulate, and offers an addictive and appealing gambling outlet for children.
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I was an original co-sponsor of H.R. 3215, an internet gambling bill considered in the last Congress, because of my grave concern that children and teenage gamblers, who have wide access to the Internet, will abuse the Internet for gambling. A study released by the American Psychological Association finds that pathological gambling is more prevalent among youths than adults. Between five and eight percent of young Americans and Canadians have a serious gambling problem, compared with one to three percent of adults. The study went on to say that with gambling becoming more accessible in U.S. society, it will be important to be able to intervene in children's and adolescent's lives before the activity can develop into a problem behavior.
Many Internet gambling sites require bare minimum information from gamblers to participate. Security on bets placed over the Internet has proven ineffective. And unlike traditional regulated casinos, Internet operators have no demonstrated ability or requirement to verify a participant's age or identification. Also, an Internet gambling site can easily take a person's money, shut down their sites, and move on.
Gambling over the Internet, particular because of the danger it poses to our children, is a business that I simply cannot condone. Given the fact that the majority of our citizens have access to computers and the Internet, we must ensure that laws are in place to eliminate the potential harm of internet gambling.
While I am concerned about the impact of gambling, I am also concerned with protecting individual freedoms and personal choices. The freedom to gamble is such a choice. I look forward to hearing the testimony and comments by our speakers today in order to reconcile these issues. We must find a way to address this very serious problem of Internet gambling.
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Ms. JACKSON LEE. I thank you very much, and I thank the gentlemen for their presentation, and Congressman Leach as well.
Over the course of my tenure in Congress, I have had the opportunity to be supportive of restrictions on Internet gambling, for a variety of reasons, but I think particularly on the issues dealing with money laundering, underage gambling, and gambling addiction, which permeate in many instances throughout the industry, regardless of whether it's Internet or person to person.
I do compliment the industry for being particularly sensitive to these issues over the years and working collaboratively with mental health groups and State groups on trying to prevent this. So I would like to find the best approach, the best reasonable approach to address a concern that will continue to grow with the utilization of Internet technology. Computer technology is growing, and we're going to find people doing everything with respect to computer software, and I think we have to be sensitive to that.
Let me ask Mr. Hornbuckle how much Federal regulation does the industry have now, just in general.
Mr. HORNBUCKLE. As it relates specifically to my activity on line, little to none.
Ms. JACKSON LEE. And overall?
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Mr. HORNBUCKLE. Currently in our activity, it all comes out of the Isle of Man, and it is underwritten by what our code, what our licensing requirements are for places like Nevada and Mississippi, Michigan, et cetera. We have a great deal of respect for what we have there, so the way we conduct our business activity and the code that's called out, which I have included, both against anti-money laundering and the regs themselves from the Isle of Man govern our overall activity.
Ms. JACKSON LEE. So you're saying that you are registered under or incorporated under the Isle of Man. Are you're talking about all the MGM properties, for example, the ones in Las Vegas?
Mr. HORNBUCKLE. No, no, just for online activity. I'm sorry.
Ms. JACKSON LEE. Let me ask you to put on your other hat, just put on the hat for the overall. Tell me what kind of regulation it is for the overall business.
Mr. HORNBUCKLE. For overall business, we're probably one of the most licensed, if not the most licensed, industries in this country. From Nevada, Mississippi, New Jersey and Michigan, there's an extensive amount of licensing we go through, and probity, both as individuals and for our company. From understanding the Wire money control Act, from understanding our customers, know your customer regimes, all of that activity goes on in our buildings. We have strict Reg 6–A requirements that we adhere to.
So, from a licensing perspective, and from a responsible gaming perspective, we have a full plate of things that we do that we look to bring to bear ultimately in this space.
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Ms. JACKSON LEE. So by licensing, obviously that equates to regulation, that equates to, as I understand it, State law enforcement, who are pretty much knowledgeable about your business.
Mr. HORNBUCKLE. One hundred percent knowledgeable.
Ms. JACKSON LEE. In the respective States, whether it's Michigan, Mississippi or Las Vegas——
Mr. HORNBUCKLE. Correct.
Ms. JACKSON LEE.—you certainly are well-known and your business is well-known, and State legislators have regulated you, it is my understanding, correct?
Mr. HORNBUCKLE. That is correct.
Ms. JACKSON LEE. And you adhere to those regulatory requirements, which subject you to either civil and/or criminal penalties?
Mr. HORNBUCKLE. That's correct.
Ms. JACKSON LEE. This is a business that you would say has gotten more dynamic over the last how many years? I'm talking about Internet gambling.
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Mr. HORNBUCKLE. The last two to 3 years specifically.
Ms. JACKSON LEE. And it brings in about how much money?
Mr. HORNBUCKLE. It's suspect, but our best guess is between $4–5 billion and growing, growing particularly in Asia and Europe, as well as in the U.S. Despite the activity that has gone on over the last year, the U.S. continues to grow at about a 20 percent rate, we believe.
Ms. JACKSON LEE. Why the approach using the Isle of Man as opposed to the different jurisdictions that you're already in, the different States that you're already in?
Mr. HORNBUCKLE. Because of concerns for the Wire Act, and what is happening here in the U.S., we didn't think it prudent, given all that was at stake. We do not accept U.S. bets. We consider that off limits for now, and until this is made crystal clear to us, we will not accept U.S. bets.
The Isle of Man presented a jurisdiction that was very serious about money laundering. It has, much like Nevada is based on gaming, it is based on financial market sectors. They restricted their operation in taking U.S. bets, and they required all their operators to put up a two million pound bond to protect consumers. Those are some of the things that regulation would bring. We couldn't get licensed unless we put up two million pounds, that sits in trust for consumers if we decide to cease doing business.
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Ms. JACKSON LEE. Do you think you're prone to more criminal activity, or have you surmised, or are you willing to give me the honest truth? Have you surmised a great deal of criminal activity in light of your present structure?
Mr. HORNBUCKLE. No. To the contrary. We are very focused on our business. We have so much at stake for this venture, we're very focused on our business.
Ms. JACKSON LEE. Let me talk to Mr. Malcolm at this point. As I indicated, I have been supportive, but I would think—Mr. Chairman, would you yield me an additional minute?
Mr. COBLE. One additional minute.
Ms. JACKSON LEE. Thank you.
I have noted that the Department of Justice has its hands quite full. What component with the Wire Act, I know, and what other aspects of the gambling industry here in the States do you regulate presently?
Mr. MALCOLM. Specifically, there are——
Ms. JACKSON LEE. Federal jurisdiction. That's what I mean.
Mr. MALCOLM. There are several Federal statutes that cover this particular topic. The Wire Act is only one of them. The Wire Act makes it a crime to transmit in interstate or foreign commerce bets on——
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Ms. JACKSON LEE. Existing. These are existing——
Mr. MALCOLM. Right. In 1952, the Travel——
Ms. JACKSON LEE. I could run through them rather quickly because my time is going to go, and I just want to——
Mr. MALCOLM. 1084, 1952, 1955, RICO could arguably apply. There are several other statutes.
Ms. JACKSON LEE. RICO I know could apply to what I would call person-to-person gambling, or the industry itself. Is there something in particular that—just forget about on-line. Do you regulate the industry, or do you interact with the States? You have specific laws to regulate the industry as it stands now, without online?
Mr. MALCOLM. I'm not sure of the interplay between the Federal regulators and the State regulators, but suffice it to say we work closely with them. Some of the Federal statutes are specifically enabled based on a violation of State law.
Ms. JACKSON LEE. Let me just comment on that. I appreciate it very much. I have always been one, when it comes to enhancing protection by utilizing the Federal authority, I am certainly open to it. I respect the work of Chairman Leach, but I perceive more potential confusion than not without a full appreciation of the impact of the prohibition on using credit cards and other vehicles, other bank instruments, to gambling on the Internet.
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What I would propose, Mr. Chairman, and would think would be valuable, is to look carefully at 1223—additional 30 seconds, Mr. Chairman. I just want to close this sentence. What I'm concerned about, Mr. Chairman, is the fact that we need to study this question and understand it a little better, to see how the mix of State regulations, which Mr. Hornbuckle seems to be very much regulated on his regular gambling, and see how that works in order to tell us what is the best way to get to the point of prohibiting money laundering, underage gambling, and gambling addictions, versus the total prohibition, before we know what the facts are.
I thank the gentleman for yielding.
Mr. COBLE. The gentlelady's time has expired.
Folks, we have another hearing scheduled for this afternoon, but since there are only four of us here, I'm going to do a second round. Let's do a second round real quickly. I have three questions I want to put to you, and I am going to start with Mr. Malcolm.
Mr. Malcolm, I think you have some problems with the injunction provisions, do you not?
Mr. MALCOLM. That is correct.
Mr. COBLE. Is there a more effective way of drafting the injunction provisions of the bill?
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Mr. MALCOLM. Specifically, I have problems with a couple of the injunction provisions. With respect to the ISPs, section 3(c)(4) imposes limitations on the relief that ISPs—that can be granted against ISPs. In addition, the websites themselves have ancillary services. But we're working with the industry to tinker with that.
More particularly, Mr. Chairman, there are limitations, there are various factors set forth in section 3(c)(5) of the bill. We believe that, while we recognize the important role the regulators have to play—and we're working with Treasury to ensure coordination—we object to the addition of any factors beyond the standard factors set forth in Federal Rules of Civil Procedure 65.
Mr. COBLE. Thank you.
Mr. Hornbuckle—strike that. Mr. Modisett, your argument, I believe, seems to suggest that to legalize Internet gambling seems to be based upon the size of the industry and the rate of growth that it's increasing. Some would suggest that it is not responsible for governments to legalize a criminal activity simply because it's growing or flourishing.
What do you say to that?
Mr. MODISETT. I would not say that my argument is based on the growth factor. I would say it is based on, first of all, the fact that those people who are playing, whatever the size, are currently in a highly unregulated environment. And I'm not referring to Mr. Hornbuckle's enterprise. I'm referring to those that are basically out of the Caribbean Islands and some of the other 1,800 that have been referred to here today.
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I would like to drive those into a highly regulated space so that we have more control, more consumer protections, could impose preset loss limits, we could do a better job of making sure that minors aren't gambling, various other advantages that would come from this highly regulated regime.
My other concern is based on the fact that we have heretofore not jumped into an Internet space and called for an out-and-out prohibition, with the possible exception of such an obvious evil as child pornography. But with regard to something that is legal in some areas, not legal in other areas, this would be our first jump in, where we just out-and-out said that we are not going to allow an American business to have any financial transactions whatsoever.
I think that is a very big move, and it's a move that should take place only after further study.
Mr. COBLE. Good. Thank you, sir.
Finally, Mr. Leach. Some contend that Internet gambling is already illegal under the Wire Act and, therefore, this legislation is unnecessary. I'm not saying that. Some say it.
Comment on this, if you will, and explain why your bill is necessary?
Mr. LEACH. I accept the premise that I believe the Wire Act covers Internet gambling, although some court jurisdictions have gone to the contrary. But what our bill does—and it's carefully crafted to fit into whatever your Committee does—it is an added enforcement mechanism of whatever the law is at any point in time. So if you want to expand or contract the law, that's the jurisdiction of this Committee with the Congress. But all we do is add an enforcement mechanism.
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It happens, and it's really a bizarre fact of how the private sector interrelates with the public, that the public has had virtually no capacity to enforce this, so your Department of Justice can testify that there are all these gambling sites but it cannot testify that it has terribly effectively shut them down. I'm not saying that the fault of the Department of Justice. All I'm saying is that that's a circumstance.
The approach of this bill is designed simply to serve as a functional deterrent, based on enforcement utilizing the private sector. Let me tell you, it has taken a lot of effort to get acceptability or consensus, as grudgingly as it may be, because you're putting a new obligation on the private sector, a private sector that principally the Financial Services Committee interrelates with more than other Committees of the Congress.
I personally accept the broad interpretation that the Justice Department has applied, that the Wire Act does apply to Internet gambling, but there is no precise reference in the Wire Act to that, so it's a broad interpretation of intent, I think, would be the description, as a nonlawyer having the disadvantage of addressing all of you that are better educated.
Mr. COBLE. Thank you, Mr. Leach. I see my red light is about to appear.
The gentleman from Virginia.
Mr. SCOTT. Thank you, Mr. Chairman.
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The gentleman from Iowa indicated or asked us to make the social case for Internet gambling. Frankly, I think it's a difficult case to make, but that's not the question before us. I think the Justice Department official, Mr. Malcolm, has indicated that it's already out there, so the question is what are you going to do.
This bill, H.R. 21, doesn't prohibit Internet gambling. It makes it a little more administratively challenging to place the bet, but as we've heard, not impossible and not even that difficult, after you do a little investigation. So the social case isn't the question before us. The question is what to do about reality.
I would ask Mr. Hornbuckle, can you access your site from outside of the United States, anywhere outside of the United States?
Mr. HORNBUCKLE. There are about ten countries that we accept wagers from. UK is our principal market, though, by example.
Mr. SCOTT. Canada?
Mr. HORNBUCKLE. No.
Mr. SCOTT. Mexico?
Mr. HORNBUCKLE. No. Mostly Western Europe, South Africa, New Zealand, principally in Western Europe and a couple of Scandinavian countries.
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Mr. SCOTT. Now, you pay off your bets because your reputation would be at stake if you didn't. The problem with websites is you can create a website today and shut it down tomorrow afternoon. If we don't regulate it, what prohibition would there be, or how would you deal with a website that sets up, takes a lot of money, and then just closes down? What remedy would a gambler have if that happened?
Mr. HORNBUCKLE. In today's environment—I can think of three sites over the most recent Super Bowl, where the underdog won and it closed. I know it's reality, but they did, in fact, close. To my understanding, those people were left unpaid.
In the Isle of Man, or in any regulated environment—in our example of the Isle of Man, we are bonded for two million pounds. That's what that money is for. To the extent we went out of business, or anybody else would go out of business, there would be reserve funds to take care of those people.
Mr. SCOTT. Does the two million pounds, how does that compare to the money that's coming in and out?
Mr. HORNBUCKLE. Right now, the money that comes in and out on an ongoing basis, that we hold in balance, where people leave an account, it's maybe 5 percent of that number. It's not—and it's monitored constantly by the government. To the extent it approaches it, they have reserved the right to look at that number again.
Mr. SCOTT. So that you would be bonded for the amount that would be owed if you went out of business?
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Mr. HORNBUCKLE. That's the theory behind it, yes. Obviously, it's a new industry, but that is absolutely the theory behind that bond.
Mr. SCOTT. And if somehow I got access to a fancy looking website and gambled and happened to win, and they went out of business, if they were unregulated I would have no recourse?
Mr. HORNBUCKLE. That's correct.
Mr. SCOTT. Thank you, Mr. Chairman.
Mr. COBLE. Thank you.
The gentleman from Florida.
Mr. FEENEY. Mr. Hornbuckle, when it is your physical casino at MGM, you entertain ''high rollers''. Do you pre-qualify them with credit applications and verification, the same way a banker would do?
Mr. HORNBUCKLE. In some instances, that's correct.
Mr. FEENEY. Do you do that with any of your Internet gamblers as well?
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Mr. HORNBUCKLE. Yes, we do. Again, the documents that we submitted, under the money laundering provisions, anybody who puts over a thousand dollars on deposit has got to then give to us copies of either a passport, national ID, or some other form of ID that the Government has specified. So the answer is, at that level or above, it's not identical but close in principle to what we do in highly regulated markets like in Nevada.
Mr. FEENEY. But presumably, if we did not disallow or prohibit financial institutions from providing credit to gamblers, presumably there would be no prohibition from somebody without the ability to comfortably lose a significant sum of money, $500 or $1,000 or more. There would be nothing to require the casino or the financial institution, other than the credit limit on their credit card, to regulate whether or not this was a prudent amount of money for somebody to be putting down on a game of chance.
Mr. HORNBUCKLE. In an unregulated market, I would have to agree with that. In a regulated market, at least you have an opportunity to get into that discussion. I guess that could be said about many things in life as well. I mean, this happens to be gaming, but I think regulatory restrictions on that are key.
Mr. FEENEY. I guess I wanted to ask Congressman Leach, because I'm very sympathetic toward the goals of H.R. 21. But it does seem to me that in certain types of high risk investments, for example, the SEC and other regulators require that the sellers and the marketers of the instruments, they are a very high risk insurer that is only a small percentage of the net worth of the individual that's being put into this high risk venture.
Isn't there an opportunity through regulation that doesn't exist through prohibition to sort of, you know, protect people from themselves?
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Mr. LEACH. Well, I think you can provide a modicum of protection. You know, that's clear. Whether that protection is very significant in relationship to the broad scope of the problem is a matter of individual judgment. I would fully acknowledge that there are advantages to some types of protection relative to no types of protection, but I believe the subject matter in general is one that, if you can't make a social case for it, what difference does it make if you have a little more protection? So I don't find it a compelling concern. Certainly, parts of things that MGM would propose today are quite respectable.
Mr. FEENEY. I think that's a fair admission. I mean, certainly we have a lot of seniors in Florida, and some of them have been to the dog track every day of their adult lives. They get to a point where they can't drive, can't travel, and if somebody with a net worth of a million dollars wants to bet $20 on the third race every day at Calder from his living room, I don't think you're suggesting that that is necessarily anti-social or dangerous behavior.
Mr. LEACH. I think there are examples where one could find this is quite a tolerable circumstance. There are also examples where one would say this is truly tragic for the individuals involved.
Mr. FEENEY. Mr. Modisett, or maybe Mr. Malcolm as well may want to answer this last question. The ingenuity and creativity and the technical skills of young people never ceases to amaze me. They are able to break into Pentagon-secure matters and they are able to turn upside down the whole computer networks of corporations. My oldest son is just 10, but at some point, if he wants to get into my credit card system and my computer system and avail himself, I have no doubt that he or somebody like him, at age 14 or 16, will have all of the knowledgeable capabilities necessary.
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How do you deal with the issue that, at least if he tries to enter a casino, somebody is going to have to look him in the eye and presumably be responsible for physically carding him, physical security, et cetera. How do you answer the question that there simply is no way to regulate what goes on inside that house with people under age? It's not addicts, necessarily, but people who are not able to lawfully consent to the contract.
Mr. MODISETT. I think that with regard to actual computer hackers, those that are quite proficient at getting around particular systems, as Mr. Hornbuckle said, there is no foolproof way that you could say 100 percent to keep them out. But I would say that the instance with regard to Internet gaming would be no worse than it would be with regard to any other activity on the Internet.
There is technology out there—and MGM has referred to some of it—that is about as foolproof as you can get in modern society and high technology. I would rather see a piece of that sort of technology—I was advising at one point another company that was skill-based, so it wasn't wasn't gaming but was skill-based on the Internet. They had the technology, and others do now, to make sure that no juveniles were using it. They had preset limits so that no one could go over a particular amount, the sort of regulation that you would like to see instead of it being the ''wild west'', which we have, with regard to too many of these Internet gaming sites now.
Mr. MALCOLM. May I briefly respond, Mr. Feeney?
I think you hit the nail on the head. While perhaps there is software out there that is as good as it can be, my understanding is that that software is far from perfect. In addition to that, software is easily manipulable. If you have a physical location where a minor has to go, they can get proof of identification, they can eyeball that person. This is not a hypothetical problem. One in ten boys, every month, is engaging on a monthly basis in Internet gambling. College students, who have recently gotten credit cards but have no money, are up to their eyeballs in debt because they're spending all night on online gaming poker situations.
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Mr. MODISETT. If I could just add to that, Mr. Congressman, I was chair of the Indiana Gambling Impact Study Commission, and when we did our poll, we also asked questions about Internet gaming among youth. We came up with 0.4 percent that had said they had even attempted to gamble on the Internet. So——
Mr. MALCOLM. I would just refer to—There's a study coming out by the Annenberg Public Policy Center at the University of Pennsylvania, and that's where I got that statistic from.
Mr. COBLE. The gentleman's time has expired.
Mr. Scott?
Mr. SCOTT. Mr. Chairman, I would ask Mr. Malcolm if he would be willing to respond to questions in writing, particularly about the section that I indicated, and I think the Ranking Member of the Committee has some questions about that section.
Mr. MALCOLM. I would be delighted to, Mr. Scott.
Mr. SCOTT. With that, Mr. Chairman, I would ask unanimous consent that the hearing record be kept open until at least the mark up on either of these bills.
Mr. COBLE. And I would also say that any Member of the Subcommittee who wanted to submit written requests, that would be in order.
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Gentlemen, we thank you all for your contribution today. This concludes the hearing and we appreciate your contribution.
The record will remain open for 1 week. Thank you for your cooperation. The Subcommittee stands adjourned.
[Whereupon, at 3:20 p.m., the Subcommittee adjourned.]
A P P E N D I X
Material Submitted for the Hearing Record
PREPARED STATEMENT OF THE HONORABLE HOWARD COBLE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NORTH CAROLINA
Today, the Subcommittee on Crime, Terrorism, and Homeland Security addresses a serious and growing problem for our Country. The problem of Internet gambling. It is now estimated that $4.2 billion is wagered over the Internet each year. This is an increase from $445 million just six years ago. There are currently more than 1,800 Internet gambling sites, and the total dollar amount wagered worldwide is expected to reach $10 billion in the near future.
The most troubling aspect of Internet gambling is the relative ease of accessibility for our nation's children. The anonymous nature of the Internet makes it almost impossible to prevent underage gamblers from using their parents' credit cards, or even their own in some cases, to log on to a gambling website. Many Internet sites require nothing more than a name, address, and credit card number. Those sites that do require a person to disclose his or her age make little or no effort to verify this information.
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Another group of people particularly susceptible to Internet gambling are America's problem gamblers. The National Council on Problem Gambling estimates that there are currently eleven million Americans directly suffering from gambling problems. High rates of financial debt, unemployment, bankruptcy, divorce, homelessness, and suicide are all associated with problem gambling. Virtual casinos and their video game structure have been labeled the ''crack cocaine of gambling.'' These facilities are open twenty-four hours a day, seven days a week, all within a person's own home. By making gambling more convenient, it can do nothing but make the problem worse.
In addition to the social problems associated with Internet gambling, these Internet sites also offer organized crime groups a very simple and easy opportunity to launder the proceeds of their criminal activity. Because of the lack of oversight or regulations and the high degree of anonymity, money laundering through Internet gambling sites is already a major concern to our nation's law enforcement agencies.
Federal law is currently unclear as to whether or not all types of Internet gambling is illegal. The statute that most directly restricts the use of the Internet to place bets is the ''Wire Act'' under section 1084 of Title 18 of the U.S. Code. However, because this statute was written before the age of the Internet and the use of wireless communication, there is ambiguity as to what type of betting is or is not covered. Also, the types of gambling mentioned in the statute may not cover all of the different types of gambling available on the Internet.
Today we will examine two bills that attempt to address the problems of internet gambling in two very different ways. H.R. 21, the ''Unlawful Internet Gambling Funding Prohibition Act'' introduced by Congressman Jim Leach of Iowa, seeks to ban Internet gambling by prohibiting the use of financial instruments, such as credit cards, in any transaction invoving illegal Internet gambling. H.R. 3215, the ''Combatting Illegal Gambling Reform and Modernization Act'' introduced by Congressman John Conyers of Michigan, seeks to establish a commission to study the feasibility of regulating Internet gambling rather than banning it.
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I look forward to the testimony of the witnesses here today which will help this Subcommittee decide what is the best approach to take with regard to this very important subject.
PREPARED STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA
Thank you Mr. Chairman for holding this very important hearing. I would like to commend my colleague, Congressman Jim Leach, on his tireless efforts to address the problem of Internet gambling.
The Internet is a revolutionary tool that dramatically affects the way we communicate, conduct business, and access information. As it knows no boundaries, the Internet is accessed by folks in rural and urban areas alike, in large countries as well as small. The Internet is still expanding by leaps and bounds and more and more citizens are logging on to the Internet at home; however, it has not yet reached its full potential as a medium for commerce and communication.
One of the main reasons that the Internet has not reached its potential is that many folks view it as a wild frontier, with no safeguards to protect children and very few legal protections to prevent online criminal activity. The ability of the World Wide Web to penetrate every home and community across the globe has both positive and negative implications—while it can be an invaluable source of information and means of communication, it can also override community values and standards, subjecting them to whatever may or may not be found online. In short, the Internet presents a challenge to the sovereignty of civilized localities, States, and nations to decide what is appropriate and decent behavior.
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Gambling is an excellent example of this situation. Gambling is currently illegal in the United States unless regulated by the States. As such, every state has gambling statutes to determine the type and amount of legal gambling permitted. With the development of the Internet, however, prohibitions and regulations governing gambling have been turned on their head. No longer do people have to leave the comfort of their homes and make the affirmative decision to travel to a casino—they can access the casino from their living rooms with the click of a button.
Since 1868, the federal government has enacted federal gambling statutes when a particular type of gambling activity has escaped the ability of states to regulate it. For over one hundred years, Congress has acted to assist states in enforcing their respective policies on gambling when developments in technology of an interstate nature, such as the Internet, have compromised the effectiveness of state gambling laws.
The negative consequences of online gambling can be as detrimental to the families and communities of addictive gamblers as if a bricks-and-mortar casino was built right next door. Online gambling can result in addiction, bankruptcy, divorce, crime, and moral decline just as with traditional forms of gambling, the costs of which must ultimately be borne by society.
Gambling on the Internet is especially enticing to minors, pathological gamblers, and criminals. There are currently no mechanisms in place to prevent youths—who make up the largest percentage of Internet users—from using their parents' credit card numbers to register and set up accounts for use at Internet gambling sites. In addition, pathological gamblers may become easily addicted to online gambling because of the Internet's easy access, anonymity and instant results. Dr. Howard J. Shaffer, director of addiction studies at Harvard, likens the Internet to new delivery forms of addictive drugs: ''As smoking crack cocaine changed the cocaine experience, I think electronics is going to change the way gambling is experienced.'' Finally, Internet gambling can provide a nearly undetectable harbor for criminal enterprises. The anonymity associated with the Internet makes online gambling more susceptible to organized crime and money laundering.
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I have long been a champion of the Internet and an advocate of limited government regulation of this new medium. However, that does not mean that the Internet should be a regulatory free zone or that our existing laws should not apply to the Internet. I think we can all agree that it would be very bad public policy to allow offline activity deemed criminal by states to be freely committed online and to go unpunished simply because we are reluctant to apply our laws to the Internet.
Gambling on the Internet has become an extremely lucrative business. Numerous studies have charted the explosive growth of this industry, both by the increases in gambling websites available, and via industry revenues. The Internet gambling industry's revenues grew from $445 million in 1997 to an estimated $4.2 billion in 2003. It has been reported that there are currently more than 1,800 gambling sites. Furthermore, industry analysts estimate that Internet gambling could soon easily become a $10 billion a year industry.
Most of the more than 1,800 Internet gambling websites are operated from offshore locations. Virtual betting parlors accepting bets from individuals in the United States have attempted to avoid the application of United States law by locating themselves offshore and out of our jurisdictional reach. These offshore, fly-by-night Internet gambling operators are unlicensed, untaxed and unregulated and are sucking billions of dollars out of the United States. In addition, the FBI and the Department of Justice have recently testified that Internet gambling serves as a vehicle for money laundering and can be exploited by terrorists to launder money.
H.R. 21, the Unlawful Internet Gambling Funding Prohibition Act will add a new provision to the law that would prohibit a gambling business from accepting certain forms of non-cash payment, including credit cards and electronic funds transfers, for the transmission of illegal bets and wagers. The bill also gives Federal and State law enforcement new injunctive authority to prevent and restrain violations of the law.
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H.R. 21 will return control to the states by protecting the right of citizens in each State to decide through their State legislatures if they want to allow gambling within their borders and not have that right taken away by offshore, fly-by-night operators.
The 104th Congress created the National Gambling Impact Study Commission and charged it with conducting a comprehensive legal and factual study of gambling, including an assessment of the interstate and international effects of gambling by electronic means, including the use of interactive technologies and the Internet. The Commission recommended to Congress that federal legislation is needed to halt the expansion of Internet gambling.
As the National Gambling Impact Study Commission has documented, and Senate and House hearings have confirmed, Internet gambling is growing at an explosive rate. It evades existing anti-gambling laws, endangers children in the home, promotes compulsive gambling among adults, preys on the poor, and facilitates fraud. H.R. 21 will help to stop this harmful activity before it spreads further. I urge my colleagues to support this very important legislation.
HR 1223, the Internet Gambling Licensing and Regulation Commission Act, attempts to attack the Internet gambling problem from another angle, namely regulation. The bill establishes a commission to study the issues involved with the licensing and regulation of Internet gambling activities.
However, there are many concerns associated with setting up a national commission to regulate the offshore Internet gambling industry. Regulation would legitimize gambling activities, which have been shown to cause addictive behavior, bankruptcies, and associated family problems. In addition, it is doubtful that regulation would effectively curb the fraud, money laundering and other organized criminal activities associated with offshore Internet gambling websites.
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Thank you again, Mr. Chairman, for holding this important hearing.
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Note: At the time of the printing of this hearing, no response to Rep. Conyers' questions had been received by the Subcommittee on Crime, Terrorism, and Homeland Security.