[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
FINANCIAL ASPECTS OF INTERNET GAMING: GOOD GAMBLE OR BAD BET?
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
__________
JULY 12, 2001
__________
Printed for the use of the Committee on Financial Services
Serial No. 107-34
U.S. GOVERNMENT PRINTING OFFICE
74-100 PS WASHINGTON : 2001
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York
MARGE ROUKEMA, New Jersey, Vice BARNEY FRANK, Massachusetts
Chair PAUL E. KANJORSKI, Pennsylvania
DOUG BEREUTER, Nebraska MAXINE WATERS, California
RICHARD H. BAKER, Louisiana CAROLYN B. MALONEY, New York
SPENCER BACHUS, Alabama LUIS V. GUTIERREZ, Illinois
MICHAEL N. CASTLE, Delaware NYDIA M. VELAZQUEZ, New York
PETER T. KING, New York MELVIN L. WATT, North Carolina
EDWARD R. ROYCE, California GARY L. ACKERMAN, New York
FRANK D. LUCAS, Oklahoma KEN BENTSEN, Texas
ROBERT W. NEY, Texas JAMES H. MALONEY, Connecticut
BOB BARR, Georgia DARLENE HOOLEY, Oregon
SUE W. KELLY, New York JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio MAX SANDLIN, Texas
CHRISTOPHER COX, California GREGORY W. MEEKS, New York
DAVE WELDON, Florida BARBARA LEE, California
JIM RYUN, Kansas FRANK MASCARA, Pennsylvania
BOB RILEY, Alabama JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio JANICE D. SCHAKOWSKY, Illinois
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, North Carolina CHARLES A. GONZALEZ, Texas
DOUG OSE, California STEPHANIE TUBBS JONES, Ohio
JUDY BIGGERT, Illinois MICHAEL E. CAPUANO, Massachusetts
MARK GREEN, Wisconsin HAROLD E. FORD Jr., Tennessee
PATRICK J. TOOMEY, Pennsylvania RUBEN HINOJOSA, Texas
CHRISTOPHER SHAYS, Connecticut KEN LUCAS, Kentucky
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
GARY G. MILLER, California WILLIAM LACY CLAY, Missouri
ERIC CANTOR, Virginia STEVE ISRAEL, New York
FELIX J. GRUCCI, Jr., New York MIKE ROSS, Arizona
MELISSA A. HART, Pennsylvania
SHELLEY MOORE CAPITO, West Virginia BERNARD SANDERS, Vermont
MIKE FERGUSON, New Jersey
MIKE ROGERS, Michigan
PATRICK J. TIBERI, Ohio
Terry Haines, Chief Counsel and Staff Director
Subcommittee on Oversight and Investigations
SUE W. KELLY, New York, Chair
RON PAUL, Ohio, Vice Chairman LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York JAY INSLEE, Washington
ROBERT W. NEY, Texas JANICE D. SCHAKOWSKY, Illinois
CHRISTOPHER COX, California DENNIS MOORE, Kansas
DAVE WELDON, Florida STEPHANIE TUBBS JONES, Ohio
WALTER B. JONES, North Carolina MICHAEL CAPUANO, Massachusetts
JOHN B. SHADEGG, Arizona RONNIE SHOWS, Mississippi
VITO FOSSELLA, New York JOSEPH CROWLEY, New York
ERIC CANTOR, Virginia WILLIAM LACY CLAY, Missouri
PATRICK J. TIBERI, Ohio
C O N T E N T S
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Page
Hearing held on:
July 12, 2001................................................ 1
Appendix:
July 12, 2001................................................ 37
WITNESSES
Thursday, July 12, 2001
Avioli, Gregory C., Deputy Commissioner, Chief Operating Officer,
National Thoroughbred Racing Association....................... 30
Fahrenkopf, Frank J., Jr., President and CEO, American Gaming
Association.................................................... 16
Kyle, Penelope W., President, North American Association of State
and Provincial Lotteries; Executive Director, Virginia Lottery. 29
Lorenz, Valerie C., Ph.D., Executive Director, President of the
Board, Compulsive Gambling Center, Inc......................... 15
MacCarthy, Mark, Senior Vice President, Public Policy, Visa
U.S.A., Inc.................................................... 25
Saum, William S., Director of Agent, Gambling and Amateurism
Activities, National Collegiate Athletic Association........... 23
Schneider, Sue, Chairman, Interactive Gaming Council............. 27
Sinclair, Sebastian, Vice President, Christiansen Capital
Advisors, LLC.................................................. 11
Suarez, John Peter, Director, Division of Gaming Enforcement, New
Jersey Department of Law and Public Safety..................... 9
Whyte, Keith S., Executive Director, National Council on Problem
Gambling....................................................... 13
APPENDIX
Prepared statements:
Kelly, Hon. Sue W............................................ 38
Oxley, Hon. Michael G........................................ 51
Gutierrez, Hon. Luis V....................................... 60
Leach, Hon. James A.......................................... 53
Avioli, Gregory C............................................ 190
Fahrenkopf, Frank J., Jr..................................... 137
Kyle, Penelope W............................................. 185
Lorenz, Valerie C............................................ 123
MacCarthy, Mark.............................................. 155
Saum, William S.............................................. 146
Schneider, Sue............................................... 169
Sinclair, Sebastian.......................................... 84
Suarez, John Peter........................................... 61
Whyte, Keith S. (with attachments)........................... 109
Additional Material Submitted for the Record
Page
Kelly, Hon. Sue W.:
University of Santa Clara, Department of Communication,
``Real World Reporting,'' Spring, 2001..................... 41
Fahrenkopf, Frank J., Jr.:
Written response to questions from Hon. Luis V. Gutierrez.... 143
Written response to questions from Hon. Sue W. Kelly......... 145
Kyle, Penelope W.:
Written response to questions from Hon. Luis V. Gutierrez.... 187
Written response to questions from Hon. Sue W. Kelly......... 188
Lorenz, Valerie C.:
Written response to questions from Hon. Luis V. Gutierrez.... 127
MacCarthy, Mark:
Written response to questions from Hon. Luis V. Gutierrez.... 166
Written response to questions from Hon. Sue W. Kelly......... 167
Saum, William S.:
Written response to questions from Hon. Luis V. Gutierrez.... 149
Written response to questions from Hon. Sue W. Kelly......... 152
Schneider, Sue:
Written response to questions from Hon. Luis V. Gutierrez.... 181
Written response to questions from Hon. Sue W. Kelly......... 184
Sinclair, Sebastian:
Written response to questions from Hon. Sue W. Kelly......... 105
Suarez, John Peter:
Written response to questions from Hon. Luis V. Gutierrez.... 77
Written response to questions from Hon. Sue W. Kelly......... 80
Whyte, Keith S.:
Written response to questions from Hon. Luis V. Gutierrez.... 115
Australian Registered Bookmakers' Advisory Council, prepared
statement...................................................... 198
FINANCIAL ASPECTS OF INTERNET GAMING:
GOOD GAMBLE OR BAD BET?
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THURSDAY, JULY 12, 2001
U.S. House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on Financial Services,
Washington, DC.
The subcommittee met, pursuant to call, at 2:10 p.m. in
room 2128, Rayburn House Office Building, Hon. Sue W. Kelly,
[chairwoman of the subcommittee], presiding.
Present: Chairwoman Kelly; Representatives Fossella, Oxley,
Cantor, Tiberi, Gutierrez, Inslee, Crowley, Clay and LaFalce.
Also Present: Representatives Leach and Goodlatte.
Chairwoman Kelly. This hearing of the Subcommittee on
Oversight and Investigations will come to order. Without
objection, all Members' opening statements will be made part of
the record.
We convene here today to listen to testimony from two
panels of distinguished witnesses about a timely but
controversial topic: gambling on the internet. In a few short
years, the internet gambling industry has exploded. According
to an internet gambling committee of the National Association
of Attorneys General, there were less than 25 sites on the web
in the mid-1990s.
Today, Bear Stearns, one of the Nation's leading securities
firms, estimates that there are between 1,200 and 1,400 e-
gaming websites. Bear Stearns projects that as this industry
continues to grow, such internet sites could generate an
estimated $5 billion in revenues by 2003. That figure
approximates roughly one-half of last year's casino earnings in
the State of Nevada.
Internet gambling presents a complex set of legal,
financial, technical and social challenges. On the legal front,
it is believed that most forms of interstate internet gambling
are prohibited by Federal law under the Interstate Wire Act.
For years authorities have used the Wire Act to combat illegal
betting by phone or other wire communications. Now with the
advent of internet technology, the Wire Act and other related
provisions of Federal law also stand as a legal obstacle
against the establishment of internet casinos on U.S. soil.
The most serious offenders in the internet gambling arena
are the virtual casinos, operating offshore beyond the reach of
U.S. law. One estimate puts the number of foreign jurisdictions
authorizing or tolerating internet gambling at 50. This
includes not just the well-known bank secrecy jurisdictions of
the Caribbean, but other countries like Australia.
The lure of licensing fees and the possibility of sharing
in gambling receipts is proving to be a powerful incentive to
enter and get other businesses to enter the internet gambling
business. Antigua and Barbuda have reportedly licensed more
than 80 internet gambling websites already. They charge about
$75,000 to $85,000 as a licensing fee for a sports betting site
and $100,000 for a virtual casino. A report prepared for the
South African government as reported by the Bear Stearns study
revealed that internet gaming revenues could yield up to $140
million in foreign exchange.
While internet gambling represents a jackpot for such
foreign jurisdictions, it's a wheel of misfortune for far too
many Americans who struggle with gambling addiction and the
loss of jobs, wrecked marriages and destroyed finances that
often follow. With the click of a computer mouse, any American
armed with a credit card can have instant anonymous access to
round-the-clock gambling from the privacy of their homes.
Students on college campuses with nearly unchecked access to
credit cards issued by eager credit card companies have already
been known to rack up large gambling debts.
As we will hear today, all of the social hazards associated
with the problem of gambling at the brick-and-mortar sites are
of equal if not greater concern when it comes to online
gambling. Furthermore, internet gambling poses a serious
problem to our youth. In the areas in which gambling is legal,
strict laws have been enacted to ensure our children are
prohibited from participating.
In many homes where children are far more computer literate
than parents, what possibly is going to stop a child from
placing a bet with their parents' credit card? Since our
society has made a conscious decision to keep children from
this activity, we need to think about taking steps to ensure
that online casinos do not victimize our children. The issue of
what we can do to protect children from these sites will be one
of my first questions for our panelists today.
In addition to the social problems associated with internet
gambling, U.S. authorities warn that internet gaming offers a
powerful vehicle for laundering funds from illicit forces as
well for evading taxes. The use of credit cards and the
placement of sites offshore make locating the relevant parties,
gathering information for the necessary evidence, and
prosecuting those parties difficult, if not impossible.
In closing, let me say that the purpose of the hearing
today is one of oversight. It will help us assess what has
happened in the internet gambling arena since Congress examined
the issue last year. It's my intent, however, not to stop at
oversight, but to work with the legislative subcommittees under
this subcommittee to support appropriate legislative action in
the months ahead.
Internet gambling can no longer simply be left to random
events and foreign jurisdictions. It's time for Congress to
address these issues and identify an appropriate public policy
response.
I would like to let the Members of the subcommittee and the
witnesses before us know today that it is my intention to
enforce the 5-minute rule, and I would appreciate your
cooperation in this. At this time, I am going to recognize Mr.
LaFalce.
[The prepared statement of Hon. Sue W. Kelly can be found
on page 38 in the appendix.]
Mr. LaFalce. I thank the Chairlady, and I commend her for
holding what I consider to be an extremely important hearing.
I hope that this hearing marks what will be only the first
step in this Congress to address the very serious social
problems sometimes associated with the expansion of gambling
throughout our country and the recurring reliance on gambling
in some areas as an economic development tool. I have been
concerned for many years with the expansion of high-stakes
gambling and was the first House sponsor of legislation that
called for the creation of a national commission to study the
impact of the spread of gambling on individuals, families and
communities.
I was joined at that time by Congressman Frank Wolf, and
especially with his leadership in the following Congress, the
95th Congress, we were able to obtain passage of that
legislation.
Gambling has become too widespread a phenomenon in American
society to eliminate it. We must instead focus our efforts on
ways to mitigate its potential adverse consequences on
America's families and communities. Gambling can provide a tool
for concentrating public and private investment and consumer
spending to promote economic growth, so long as it is
restricted to a very limited number of jurisdictions. But when
it expands virtually everywhere, this ability to concentrate
economic resources is lost, eliminated. And this is one of the
particular problems associated with internet gambling.
The potential negative aspects of gambling such as
excessive debt, bankruptcy, broken families, alcoholism, and
other problems will be felt in communities in every part of our
Nation without the affected communities realizing any economic
benefit or any additional tax revenues to help offset these
added social costs. In many instances, the economic benefits of
internet gambling go solely to website operators halfway around
the world.
I recognize there is a wide variation of opinion within the
Financial Services Committee and the Congress on the merits of
internet gambling in particular and gambling in general. But I
believe and very strongly that internet gambling represents a
threat to many of the most vulnerable segments of our
population, especially young people who know the medium so well
and who are so active in its use.
A dormitory room with one student, one laptop and one or a
dozen credit cards can become a virtual casino. And that is
true of any room in any building in America or in any country
in the world or any place in the world. All you have to do is
take your palm wireless out of your pocket and you can engage
in gambling anywhere in the world. And how does society benefit
from that?
The national commission recommended that Congress act to
prohibit wire transfers and other payments to known internet
gambling sites. I'm glad that our Subcommittee is examining
this issue, and I hope it will lead to legislation putting the
commission's recommendation on this subject into statute.
But we shouldn't limit our inquiry to this one area. The
commission also recommended that we prohibit the placing of
credit and debit card machines and other electronic payment
devices in the immediate vicinity of gambling activities. The
commission found that the migration of ATMs and credit card
machines inside the casino has been a significant factor in the
dramatic increase in problem and pathological gambling. I
believe our subcommittee should examine this issue and enact
legislation to carry out this other recommendation of the
national commission.
In the last Congress I introduced such a bill, H.R. 2811.
In the near future, perhaps next week, I will reintroduce that
legislation and also legislation similar to the bill that I
cosponsored with Congressman Leach in the last Congress to
prohibit the use of credit cards and other payment systems to
place bets over the internet, but without provisions adopted in
the Banking Committee last year that I believe substantially
weakened its effectiveness.
I look forward to hearing the testimony of all the
witnesses. But I am particularly pleased to welcome Dr. Valerie
Lorenz, the Executive Director of the Compulsive Gambling
Center, who is an expert in the treatment of compulsive
gambling. Dr. Lorenz has first-hand knowledge of the harm
created by internet gambling in the lives of individuals.
Madam Chairwoman, again I thank you.
Chairwoman Kelly. Thank you very much, Mr. LaFalce.
We turn next to Mr. Cantor.
Mr. Cantor. Thank you, Madam Chairwoman. First of all, I
would like to compliment you and the staff and certainly
Congressman Goodlatte, who has worked long and hard on the
issues surrounding the internet and gambling. But I would also
like to take this opportunity, Madam Chairwoman, to thank the
staff for the quality of the panelists here before us today.
One in particular, who is a personal friend of mine, Ms. Penny
Kyle, who is here on behalf of the National Association of
State and Provincial Lotteries. She is the Executive Director
of the Virginia Lottery and a personal friend. She has been in
that position at the Lottery for about 7 years in Virginia. It
was quite a coup when then-Governor, now Senator George Allen,
asked Penny to serve our commonwealth, because she has quite a
reputation both in business and government circles. So we felt
very fortunate and very lucky to have her in State government
making her contribution to the greater good of the
commonwealth.
Penny, welcome, and thanks for being here. And I yield
back, Madam Chairwoman.
Chairwoman Kelly. Thank you very much, Mr. Crowley. We are
going to hear from Ms. Kyle in the second panel and we are glad
you are here, Ms. Kyle. Next we turn to my colleague, Mr.
Crowley.
Mr. Crowley. Thank you, Chairwoman Kelly, for having this
hearing today. I want to thank the panels before us. As the
former Chairman of the Racing and Wagering Committee--that's a
great name for a committee, isn't it?--in the State legislature
in New York, I come to the Congress with some background on
some of the issues that we are going to be talking about today.
Let me just state that I am a supporter of legalized
gambling and would oppose any legislation that would hinder the
operations of gaming, whether they be by Native Americans such
as the Oneidas in New York or by government entities or by
limiting gambling for OTB in New York State or racing in New
York State and elsewhere throughout our Nation where wagering
is currently legal. If conducted fairly with adequate public
safeguards and by legal adults, I think gaming should be just
that--a game--and for leisure.
That is not to downplay the suffering, as has been
mentioned, of those who suffer from excessive gambling and
addictions caused by gambling, but I don't think we should rush
to judgment on a legal and regulated industry because of some
tragic examples. In my home State of New York, we have a very
well regulated and maintained gaming system which provides
hundreds of millions of dollars annually back to the people of
the State of New York. And I am very interested in hearing the
testimony today.
But I would hope that the subcommittee draw a distinction
between and a difference between internet gaming, which I do
have concerns for, and the policing of that potential industry,
and I have fears, as was mentioned by Mr. LaFalce, for our
young and most vulnerable in terms of this new form of gaming.
But to draw a distinction between internet gambling and the
simulcasting of horseracing throughout the country, an industry
in New York State which employs anywhere between 20 directly
and 60 thousand people indirectly in the State of New York, the
horseracing industry does. And I would hate to see anything
done that would diminish that industry in the State of New
York. And I would yield back the balance of my time.
Chairwoman Kelly. Thank you very much, Mr. Crowley.
Next we turn to a gentleman who is not a Member of the
Subcommittee, but certainly a strong Member of our committee
and has a very strong interest in this issue, Mr. Leach.
Mr. Leach. Well, thank you, Sue. And I want to express my
personal appreciation for your leadership on the issue. I have
a long statement I would like to ask simply to place in the
record.
Chairwoman Kelly. So moved.
Mr. Leach. And very quickly, just a couple of observations.
Mr. LaFalce. Jim, could you speak up a bit more? I have
difficulty hearing you.
Mr. Leach. It's my mother's fault, John.
[Laughter.]
Mr. Leach. Anyway, by way of observations, the Chair and
Mr. LaFalce have outlined some of the social implications of
this. I would only stress that these implications go far beyond
simply the participants in what could be an exponential
increase in gambling, because intermediaries have to pick up
the cost for losses. Those intermediaries are financial
institutions and credit card companies, and they make higher
fees for everybody else.
I was a little distressed to read in the testimony we are
about to receive that one of America's principal credit card
companies thinks this will be too onersome to implement a law
that addresses a settlement mechanism. And all I can say is, it
would be a lot more difficult to take care of the losses that
are likely to arise for these credit card companies. In fact,
in my time in the Congress, I would go so far as to say that
the conclusion of that testimony understands the vested
interest of the industry that it represents less than any
testimony I have ever seen.
Having said that, it strikes me that this subcommittee has
a special jurisdiction, because we have the most sensible
approach to enforcement. And the settlement mechanism is the
only effective enforcement mechanism I know of for the internet
issue. Congressman Goodlatte has helped lead this Congress in
looking at new approaches to this issue, and I want to tip my
hat to his efforts. But this subcommittee's jurisdiction is
very profound on the settlement mechanism issues. And if anyone
knows of a better, more effective enforcement mechanism is, I
am open to hear about it.
But I would only stress that the approaches that this
subcommittee can deal with, and I have reintroduced legislation
we introduced last year that passed this committee virtually
unanimously, and I might say to the gentleman from New York
that it made a very clear distinction between existing kinds of
legal gambling enterprises and other kinds of enterprises that
aren't legal. But we have an absolute utter obligation to look
at this issue on a timely basis, and that means before it gets
out of hand. And if one looks at the growth of this industry,
it is getting out of hand, and we should act as quickly as
possible.
I thank the Chair, and I'm sorry I took more time than I
intended.
[The prepared statement of Hon. James A. Leach can be found
on page 190 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Leach.
We turn now to Mr. Gutierrez.
Mr. Gutierrez. Thank you very much. I apologize for the
delay. Good afternoon, Chairwoman Kelly and thank you for
holding what as I understand is a very important hearing. Today
we are joined by a great number of experts who will share with
us their knowledge and expertise in the area of internet
gambling. I hope that with the information and expertise
gathered here today, we would be able to better address the
issues concerning the rise of the internet gambling industry.
Approximately one million Americans gamble online every
day, and about 4.5 million Americans, about 5 percent of those
with access to the internet, have gambled online at least once.
Given the substantial number of people directly and indirectly
affected by the future of internet gambling, it is our job to
guarantee that there are solid laws, secure technology, and
high-quality products in place.
Although most States allow some form of gambling
activities, many States seek to prohibit online gambling
because of the various problems associated with these. These
include greater potential for fraud, increase in gambling
addictions, protections of State tax revenues and children's
easy access to gambling sites. I am particularly concerned
about the ease with which children can access cyber casinos. In
addition, we need to invest in prevention and treatment
programs that will help gambling addicts and their families
from devastating impacts of this problem.
As you can see from my opening statement, I am ready to
listen to all parties involved, and I look forward to hearing
the testimonies so that I can make further decisions. Thank you
so much.
Chairwoman Kelly. Thank you very much, Mr. Gutierrez.
We turn now to the Chairman of the committee, Mr. Oxley.
Mr. Oxley. Thank you, Madam Chairwoman. I want to commend
you for calling today's hearing on a topic of utmost concern,
the financial aspects of internet gambling. While it may seem a
good gamble for those who engage in it, experience shows that
it is often a bad bet in the end.
Today's hearing is intended to get the lay of the land. We
will learn from an economist's viewpoint how internet gambling
has grown in recent years. We'll learn from the State law
enforcement perspective what power the States have to stop
illicit gambling on the web and what means are being taken by
criminals to evade those efforts.
We'll hear from those in the trenches, the psychologists
and counselors who on a daily basis see the devastation caused
by an unregulated industry operating in an unforgiving medium.
We'll hear from the big players in this big game of
chance--the large casinos, the State lotteries and the racing
industry. And we'll hear from the software providers, the
enablers, without whose expertise and acumen internet gambling
could not exist. And we'll hear from perhaps the most
vulnerable population, college athletics, whose contests become
fair game for gambling on the internet, whose athletes are
potentially compromised by the allure of cash payments, payouts
for throwing games or shaving points, and whose students, your
kids and my kinds, are potentially victims of a too easy,
snake-in-the-garden enticement of big winnings that often
results in financial losses that will trail them and their
families for years.
As a matter of fact, just a couple of weeks ago we had a
visit from a number of prominent NCAA coaches discussing the
problems that have developed over the gambling issue and point
shaving and the concerns that they raise. We had everybody from
Bo Schembechler, the former football coach at Michigan and my
alma mater, Miami University, as well as John Calipari, Lou
Holtz, and many, many others.
Finally, we'll hear from the credit card companies, whose
products are in most cases the instruments by which internet
gambling takes place. I am pleased to see that my full
committee colleague and former Chairman of the Banking and
Financial Services Committee, Mr. Leach, is in attendance, and
I look forward to his questions and comments on this particular
issue, since he has had enormous leadership and foresight in
this area over a number of years.
The internet to many conjures up the images of the Wild
West; the frontier; new, unconquered horizons; seemingly
unlimited potential. To those holding such a view, gambling is
just part of the tableau. But instead of Gus and Tex sitting at
the back table at the Dead Eye Saloon, engaged in a high-stakes
game of seven-card stud, we've got little Jimmy sitting at the
family computer maxing out mom's credit card. trying to beat
the spread on the Ohio State-Iowa game as posted by a virtual
casino based in the Netherlands Antilles. Tex and Gus's card
game often ended in a little ``disagreement,'' best settled at
ten paces in the middle of Main Street. Little Jimmy's losing
football bet may result in financial hardship for his family,
possible criminal prosecution, and maybe a month without
Dawson's Creek for little Jimmy.
If little Jimmy is truly a child, allowed free ability to
gamble by some fly by-night casino in the Caribbean or
elsewhere overseas, then we have much cause to be concerned. If
he is instead Big Jim, with his pocket full of sports lines,
wallet full of MasterCards and Visa cards and access to the
casinos of the world through the internet without having to
step away from the comfort of his own living room, we have the
potential for disaster. Families can be ruined, savings can be
lost. In a very real sense, we've gone from ``High Noon'' to
``Wasting Away in Margaritaville.''
I look forward to the testimony this afternoon and to
continuing dialogue as we tread this thorny but necessary path
toward a solution to a troubling and growing threat to our
Nation's financial markets and its families.
Madam Chairwoman, again I commend you and look forward to
the testimony as this subcommittee completes its first step
toward reining in this wild bronco called internet gambling.
Chairwoman Kelly. Thank you very much, Mr. Chairman.
Mr. Tiberi, have you got a statement?
[No response.]
Chairwoman Kelly. Mr. Inslee, do you have an opening
statement?
[No response.]
Chairwoman Kelly. All right. Then I'd like to ask unanimous
consent. We have with us a Member who is not a Member of our
committee but who has a very strong interest in this issue,
Congressman Goodlatte. And Mr. Goodlatte, have you any opening
statement?
Mr. Goodlatte. Madam Chairwoman, I just want to thank you
for holding this hearing and second to thank you and the other
Members of the subcommittee for your indulgence in allowing me
to participate today. This is an issue that I have a great deal
of interest in, introduced legislation in the last Congress
which received the vote of 61 percent of the Members of the
House. A companion bill introduced by Senator Kyl in the Senate
has passed the Senate on two occasions. And so this year we
want to work very closely with your subcommittee and your
concerns regarding the financial instruments used here to
formulate legislation which will be passed and address this
problem.
It's a serious problem of literally billions of dollars
being sucked out of our economy by hundreds of illegal,
unregulated, untaxed, offshore entities that are causing
problems in communities just as if the community, had a casino
in their downtown, all of the problems that come, family
problems, criminal problems, addiction problems, bankruptcy,
all of those things occur with this just as if you had the
problem right in your community.
So we as a country have an obligation to address this
problem, and I thank you for your leadership in holding this
hearing today to get us started on the information we need.
Chairwoman Kelly. Thank you very much, Mr. Goodlatte.
Mr. Fossella, did you have an opening statement?
Mr. Fossella. I'm still trying to digest what Chairman
Oxley said.
[Laughter.]
Mr. Fossella. So I don't have a statement.
Chairwoman Kelly. Thank you very much. If there are no more
opening statements, let's begin with our first panel. We'll
begin first with Mr. John Peter Suarez, the Director of the
Division of Gaming Enforcement for the New Jersey Department of
Law and Public Safety, who has recently brought suit against
three offshore casinos, focusing on their billboard advertising
and targeting of minors.
Next we have Mr. Sebastian Sinclair, Vice President of
Christiansen Capital Advisors. He is an economist who will
discuss the money involved in internet gambling and the
increasing number of internet gambling sites and give his view
of where things are going in the future.
Then we will hear from Mr. Keith Whyte, the Executive
Director of the National Council on Problem Gambling
Incorporated, who represents counselors who deal with problem
gambling, including internet gambling.
Next we will listen to Dr. Valerie Lorenz, the Executive
Director of the Compulsive Gambling Center, who is a
psychologist who treats compulsive gamblers, including internet
gamblers.
Finally, we have Mr. Frank Fahrenkopf, President and CEO of
the American Gaming Association, which represents casinos, who
will share their perspectives on these issues.
I want to thank all of you for taking time out of your busy
schedules to join us here today to share your thoughts on this
important issue. Without objection, your written statements
will be made a part of the record. You will each be recognized
in turn for a 5-minute summary of your testimony. Thank you
very much. And we'll begin with you, Mr. Suarez.
STATEMENT OF JOHN PETER SUAREZ, DIRECTOR, DIVISION OF GAMING
ENFORCEMENT, NEW JERSEY DEPARTMENT OF LAW AND PUBLIC SAFETY
Mr. Suarez. Thank you, Madam Chairwoman and Members of the
subcommittee. I appreciate very much the opportunity to speak
to you today about internet gaming.
Before addressing directly internet gaming, I would like to
give you a brief synopsis of gaming as it exists in New Jersey
today. Gaming was first legalized in New Jersey in 1977, and we
opened our first casino shortly thereafter in 1978. Since that
time, 12 casinos have opened in New Jersey, and those 12
casinos employ roughly 50,000 people in our State. Those 12
casinos generated $4.4 billion in revenue last year and
received over 34 million visitors, making it by some accounts
one of the most popular destination resorts in the United
States. The internet could change all of that.
By our estimates, and Madam Chairwoman, you alluded to
this, there are well over 1,000 internet sites located
predominately in offshore locales such as Antigua, the
Netherlands Antilles or other Caribbean countries. The typical
internet casino, though quote/unquote ``licensed'' by the host
country faces none of the regulatory scrutiny that is typically
associated with land-based casinos. Indeed, it is our view that
many of the operators of offshore casinos seek out
jurisdictions with the lowest common denominator of regulatory
scrutiny, moving their operations from places where they are
not subject to strict Government oversight.
The risks of unregulated internet gaming, or rather poorly
regulated internet gaming, should be clear to every Member of
this subcommittee: No meaningful limitation on participation by
underage gamblers or problem gamblers. No assurance as to the
integrity of the operators or the game or to the fact that
payouts will actually be received. The concerns regarding
money-laundering. Protection against security breaches,
hacking, and information oridentity theft, to name some of the
more salient concerns.
From an economic standpoint internet gaming as it exists
today fails to provide any positive benefit to the United
States in the form of income taxes or taxes or jobs. In
addition to those concerns, from New Jersey's perspective, the
fundamental problem with internet gaming is that it is a
violation of New Jersey's Constitution. Our Constitution
requires any form of gambling to be specifically approved by
the people by a vote in a referendum. The question of internet
gambling has never been put to the people of New Jersey and
therefore represents a violation of our Constitution and our
civil and criminal laws.
Faced with this industry, New Jersey has instituted legal
proceedings against three internet operators to stop them from
soliciting or accepting wagers in New Jersey. In June of this
year, the Division of Gaming Enforcement, the agency of which I
am the director, took the unusual step of filing civil
complaints against three internet casinos that were operating
and advertising in New Jersey. These three were identified
because of their billboard advertising and because of the ease
with which we could wager.
Two of the sites offered sports book and casino-style
games. The third offered just casino-style games. All three
accepted wagers from 15-, 16- and 17-year-old children without
any screening mechanism whatsoever. In our action, we have
asked the courts to enjoin these casinos from accepting wagers
from New Jersey residents and to recover funds lost by our
citizens.
Although we fully believe that our cases can and will be
won, they will present some difficult issues for the courts to
address, and those issues will take time. One of those issues
that I would like to touch on briefly is the question of
jurisdiction. As many of you Members know, many of the offshore
operators contend that since they operate in an offshore locale
where they are legally entitled to operate and the wagers are
processed in that offshore locale, they do not have any
concerns nor does the States or the Federal Government have any
jurisdiction over them. This argument is quite simply nonsense.
And as far back as 1953, New Jersey Supreme Court
recognized that a wager takes place both where the call is made
and where the call is received. That theory of jurisdiction has
been applied in just about every case that's been asked to
address internet gaming in the United States. That is the same
as the policy of the Department of Justice and has always been
that case.
Once we defeat claims about jurisdiction, however, we must
deal with the difficulty of processing or proceeding in a civil
context. In the time that it takes us to proceed, more casinos
will open up, more wagers will be accepted, more money will be
lost.
Before I mention the legislation and sum up, I would like
to say that in testifying today, I do not intend to advocate
for or against a referendum in New Jersey. I do intend,
however, to be advocating that some action must be taken. There
are obviously two choices facing the States and the Federal
Government: They are prohibition or regulation. Obviously,
regulation can and could be done along the models at land-based
casinos. Prohibition along the lines of the Leach-Kyl-Goodlatte
provisions that simply declare credit card debts or other
transactions that are a result of illegal internet wagering can
and will be enforced if that legislation is passed.
I submit to you that something can be done. The time to do
something is now. Because this is, from New Jersey's
perspective, a far too important issue to be decided by
inaction. And I do not believe that the mistaken belief in the
impossibility of enforcing a prohibition should be the basis
from which a rational decision about internet gaming should be
made.
Thank you for the opportunity for speaking to you today,
and I am available for questions if you have any.
[The prepared statement of John Peter Suarez can be found
on page 61 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Suarez.
Mr. Sinclair.
STATEMENT OF SEBASTIAN SINCLAIR, VICE PRESIDENT, CHRISTIANSEN
CAPITAL ADVISERS
Mr. Sinclair. Good afternoon. To answer your first
question, which was whether internet gambling is a good gamble
or a bad bet, I'm sorry. I don't have the answer to that.
This is an intractable problem that has imperfect
solutions. As Mr. Suarez mentioned, we have the option of
prohibition versus regulation. There is no magic bullet here.
But let's look at the state of the industry as it exists now.
We estimate that $2.2 billion was spent globally on internet
gambling last year.
The interesting aspect of that is that the majority of that
came from U.S. citizens. And in keeping with the theme that
we're talking about here today, another majority of that, about
$1 billion, was probably bet on sports, which based upon the
Cohen case, which probably appears several times in the written
testimony, is illegal in this country. Of that $1 billion that
was bet on sports, about $700 to $800 million probably came
from U.S. residents. This is what would be a prohibited
activity in this country, based upon the Cohen case.
Now let's look at what the Cohen case tells us. Mr. Cohen
was convicted of violating the Wire Wager Act. It is currently
on appeal. Most legal scholars who are familiar with the Wire
Wager Act don't expect him to win that appeal. So while the
Cohen case was a legal victory, it was a practical failure. And
it was a practical failure for two reasons. One, Mr. Cohen
voluntarily came to the United States to stand trial. And two,
his company, World Sports Exchange, is still operating and is
still taking bets from U.S. citizens.
Now as we move into the option of prohibition versus
regulation, in my perspective as an analyst and looking back at
history, we have been relatively unsuccessful in the past at
legislating away demand. In previous eras we used to be able to
do it by restricting supply. As some of the Members mentioned
today, gambling has expanded in this country to the point where
today it is now a $61.4 billion business.
Stopping supply is difficult in the Digital Age. It is
difficult, as some of the legislation has proposed, to block
access to gambling sites. As we'll get into a little further
on, choking financial transactions, which seems to be the
legislative frontrunner and probably the reason why we're here
today, has enforcement problems as well.
The first thing that we need to talk about is that you can
argue whether gambling is right or wrong, moral or immoral, but
the fact is it's pervasive. I don't know the local area very
well, but I imagine that I don't have to walk very far to buy a
DC. lottery ticket. Eighty miles from here to the East, I can
play the slot machines at Dover Downs or at Harrington Raceway.
And Washington, DC. is not unique. In any other location in
this country, I could probably make similar statements.
So the question is, how do we un-ring that bell? Through
sucessive expansion we have created demand for a product that
is today available in an unregulated environment.
So then we move on to the enforcement problem. Speaking
specifically to the credit card issues that we're talking about
here today, I see two problems with that in terms of
enforcement. One is getting foreign countries and banks to
devote time and resources to what is a legal activity in their
jurisdictions. The United Kingdom and Australia actively seek
bets from U.S. citizens. In fact, legislation was just passed
in Australia that allows them to do so.
The second problem, and I see that as more of a real
problem, because maybe the Government will be successful at
getting foreign-based banks to stop processing those
transactions. This other problem is the PayPal problem. The
third-party transaction processors. PayPal is a company that
uses digital cash. You can set up an account with wire
transfer, check, or credit card, and you can use that digital
cash at any site. I call it the PayPal problem, because that's
probably one third-party processor that you're familiar with.
But in the very near future, if this legislation, as I see it,
were to pass, it would create a whole new illegal industry, and
that's third-party internet gambling processors located in
offshore jurisdictions.
So let's explore the other option, regulation in a legal
context. The medium of the internet lends itself to regulation.
Let me give you a quick example. The Western European model of
legalizing internet gambling is to restrict it to the Nation in
which it is located. And there are very good ways to do that.
One way that is being proposed and actually being utilized is a
proprietary dialer that will only dial seven digits from where
you are. It works. It's 100 percent effective. The technology
has been approved by the Nevada Gaming Control Board, and it
effectively restricts access to gambling sites from one
location. Conversely, it's very difficult to restrict gambling
sites from coming in. And I'm out of time.
Chairwoman Kelly. You can sum up if you want.
Mr. Sinclair. OK. Real quickly.
Chairwoman Kelly. OK. That's enough.
[Laughter.]
Chairwoman Kelly. Just kidding.
Mr. Sinclair. In conclusion, I've been following this
industry for a long time, and I can understand the fears
associated with gambling and the spread of gambling. But I am
always reminded of the old adage to keep your friends close and
your enemies even closer. Gambling is a product like alcohol
that is dangerous to some. There are very real dangers
associated with gambling. But it's my belief that sweeping this
activity under the rug and handing it to criminals will do more
to exacerbate problem gambling than to help it.
[The prepared statement of Sebastian Sinclair can be found
on page 84 in the appendix.]
Chairwoman Kelly. Thank you, Mr. Sinclair.
Mr. Whyte.
STATEMENT OF KEITH S. WHYTE, EXECUTIVE DIRECTOR, NATIONAL
COUNCIL ON PROBLEM GAMBLING
Mr. Whyte. I would like to thank the Chair and the Members
of the subcommittee for the opportunity to testify on behalf of
the National Council on Problem Gambling, the Nation's oldest
and largest organization dedicated to addressing problem
gambling issues.
Since 1972, we have worked with Federal, tribal, State and
local governments, the gaming industry and other non-profits to
address problem gambling. The mission of the National Council
is to increase public awareness of problem gambling, to ensure
the availability of treatment for problem gamblers and their
families, and to encourage programs for research and
prevention.
We have consistently maintained a position of neutrality on
gambling, arguing neither for nor against it. We currently have
33 State affiliates throughout the Nation, and numerous
corporate and individual members. We are the leading United
States experts on problem gambling treatment, prevention,
research, and education.
Pathological gambling is a mental health disorder. I've
attached the standard criteria from the American Psychiatric
Association to my testimony. Prevalence-wise, about 1 percent
of the U.S. adult population would meet criteria for
pathological gambling in a given year. Another 2 to 3 percent
would meet criteria for problem gambling, which is the less
severe but certainly folks that are experiencing problems
relating to their wagering.
Now 2 to 3 percent doesn't sound like a lot. In real terms,
that translates to 11 million Americans that are facing
problems with their gambling each year.
As several Members have noted, not surprisingly, problem
gamblers suffer from a high rate of financial debt, suicide,
mental health problems and other physical disorders, and
bankruptcy are all associated with problem gambling.
Gambling on the internet is a relatively new issue, and I
would like to present a little bit of evidence that we have.
Unfortunately, the research in this area has lagged behind the
public policy debate. A recent study in Oregon shows that of 14
forms of gambling, legal and illegal gambling, only one has
grown between 1997 and 2000. That is internet gambling. If you
average it out, the growth rate in percentage terms, it's 91
percent a year.
And although internet gambling has been growing rapidly, as
many of you have noted, legalized gambling in the U.S.
participation-wise has stayed relatively the same. Anywhere
from 75 percent to 80 percent of U.S. adults will place a bet
at at least one point in their lifetime. And I think that's a
significant number for the subcommittee to recall in that
legalized gambling and gambling participation is in essence
ubiquitous throughout the United States.
As Chairwoman Kelly and Representative LaFalce have noted,
a particular area of concern is the intersection of three
trends: Access of adolescents to the internet, access of
adolescents to credit, and the propensity of adolescents to bet
on existing areas. Surveys show that participation by
adolescents is sky high. Over 40 percent have played card games
for money in the past year. Thirty-two percent have bet on
games of skill such as pool or golf. Thirty-one percent have
bet on sports, and 30 percent have bet on the lottery. It is
significant to note that not only are all four of these
activities illegal for adolescents in the United States, but
these surveys were based on telephone surveys from home. So we
can anticipate that the adolescent at home answering these
questions is possibly going to underestimate their involvement.
Furthermore, youth have access to credit. A Consumer
Federation of America survey found that over 70 percent of
undergraduates have at least one credit card. We certainly know
that this same population has enormous access to the internet.
We are increasingly concerned that this cluster of trends is
going to result in a lot more internet gambling among
adolescents.
I took a sample of 18 calls from our nationwide help line
that we have received over the past 4 months. Significantly,
four of those 18 callers to our help line were students between
the ages of 18 and 25. I have reproduced the statistics on my
chart at the end of my testimony, which I would encourage you
to examine. It is important to note that this survey is neither
representative of callers to our help line nor of problem
gamblers in the United States, nor of gamblers anywhere else.
It's an extraordinarily small sample, only about 2 percent of
our intakes.
But what we'd like to make sure that this subcommittee has
a perspective of is the enormous damage that is already
occurring from internet gambling and from legalized gambling in
the United States. The primary concern of the National Council
on Problem Gambling is not so much the increased accessibility
of the internet, but the fact that even for people that have
problems with legal gambling in the United States, there is
simply nowhere for them to go. All 18 of those callers to our
help line have an 80 percent of being denied insurance coverage
for their gambling addiction. There are only 15 States that
provide any sort of services for people with gambling problems.
We would encourage the subcommittee, as you are wrestling
with the difficult issue of internet gambling, to realize that
problem gambling extends beyond the internet to those who
already are gambling on legal activities in the United States.
But we thank you very much for the opportunity to testify, and
we will be happy to answer any questions.
[The prepared statement of Keith S. Whyte can be found on
page 109 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. Whyte.
Dr. Lorenz.
STATEMENT OF VALERIE LORENZ, Ph.D., EXECUTIVE DIRECTOR,
COMPULSIVE GAMBLING CENTER, INC., BALTIMORE, MD
Ms. Lorenz. Thank you for permitting me to testify as well.
Chairwoman Kelly. Excuse me, Doctor, would you please pull
that microphone closer and raise it so that we can hear what
you're saying? Thank you.
Ms. Lorenz. Thank you. First of all, I would like to thank
this subcommittee for permitting me to testify as well.
Briefly, I have been in the field of compulsive gambling for
nearly 30 years, and in that time, I have seen gambling
increase from the State of Nevada, which had pervasive
gambling, to now all forms of gambling in virtually every State
except three, all the way up to the internet. We have indeed
become a Nation of gamblers.
I was asked to respond to four specific questions: ``What
impact has the internet had on the problem of underage and
pathological gambling?'' Well, that's an interesting question,
but it is hard to quantify, because there is no hard data. We
have not had the research monies to really respond to that
question in a scientific way. I can tell you, though, that as
legalized gambling has increased, so has the number of
compulsive gamblers.
To add to the figures that we see in various studies which
state anywhere from 1.5 to 5 percent of the people of the
American adults are compulsive gamblers, depending on the
amount of gambling in a particular State, we also have those
people who are considered problem gamblers, those who do not
yet meet the criteria of gambling addiction but who are on the
verge of that addiction if they continue to gamble.
The largest increase that we see among compulsive gamblers
are the teenagers, the young people, those in their early
twenties, and our senior citizens. The question is, what is the
impact of compulsive gambling? One needs to remember that
gambling is an addiction, and just like alcoholism, gambling
addiction will continue into future generations. This is not
only the gambling itself, but also the impact of compulsive
gambling. It will continue into future generations. That is the
nature of addictions.
Compulsive gambling leads to financial ruin, severe
indebtedness, and to bankruptcies, to poor work productivity
and terminations, to broken homes, broken families and lost
homes, to health problems and other addictions, not just among
the gamblers but also among the gamblers' families.
It has a frightening suicide rate. And crimes which in the
past were non-violent financial crimes, have now expanded to
crimes of violence, including homicide.
We have a larger population of senior citizens than we have
ever had before in our country. Usually on a monthly basis,
these seniors will take a bus to the casinos or buy daily
lottery tickets. Now we are proposing that they stay at home
and gamble over their TV and computers. In short, they can lose
everything they have ever worked for, lose it in their own
living rooms with no chance of financial recovery, or in many
instances, survival.
For the first time in our country, we have an entire
generation growing up with Government's message that gambling
is OK. This young group of people has been schooled on
computers. Many have their own laptops. They can log onto AOL,
pull up Pogo, where half the 40 choices of games are gambling
games. It is this young population that now is being hooked. It
is so easy to forget the time spent on a computer and not to
realize how much money has been put on a credit card. All these
tools are products of gambling.
According to the Internet Gaming Council, a trade
association, it has tracked 1,400 websites that invite people
to gamble. Internet gambling would increase this number
dramatically if it were to be legalized.
Second question: ``What technical obstacles stand in the
way of these issues? Regulation?'' I would say there is no way
to regulate gambling on the internet on one's computer or
television. Quote: ``It's not just feasible for law enforcement
to monitor what people are doing in their living rooms with
their computers,'' says John Glogau, Special Counsel to Florida
Attorney General Bob Butterworth. Does this country really want
citizens who can gamble away their savings on the internet?
The third question was, ``What steps has the National
Council on Problem Gambling taken to date to curb the abuses
associated with internet gambling?'' Mr. Keith Whyte told you
some of those things. I don't know the whole question. I
resigned from the National Council due to philosophical
differences many years ago. I do know that there is a strong
cooperation of the National Council with the casino industry.
The fourth question was, ``What recommendations do you have
for this subcommittee on steps Federal and State authorities
should take to address internet gambling?'' First of all, I
would recommend, as also recommended by the National Gambling
Impact Study Commission, putting a moratorium on all expansion
of legalized gambling, including internet gambling.
Chairwoman Kelly. Dr. Lorenz, if you could sum up, please,
we would appreciate it.
Dr. Lorenz. Thank you. I further recommend that the
governments and Congress address all the issues and public
policy relative to legalized gambling and compulsive gambling,
recognize the escalation of gambling addictions, provide the
funds through top-level administrative support just as you've
done with alcoholism and drug addiction. Fight compulsive
gambling, don't condone it. I would be happy to answer any
questions.
[The prepared statement of Dr. Valerie Lorenz can be found
on page 123 in the appendix.]
Chairwoman Kelly. Thank you very much.
We turn now to Mr. Frank Fahrenkopf, Jr. We appreciate your
being here, sir.
STATEMENT OF FRANK FAHRENKOPF, JR., PRESIDENT AND CEO, AMERICAN
GAMING ASSOCIATION
Mr. Fahrenkopf. Thank you, Madam Chairwoman. The American
Gaming Association is the national trade association of the
commercial casino industry. Our members are the companies with
household names to many, such as Harrah's, MGM Mirage, Mandalay
Resort Group, Park Place Entertainment. We operate land-based
and riverboat casinos in 11 States across the country.
Consideration of questions about internet gambling we
believe must be viewed in light of the nature of gaming and how
decisions about public policy issues concerning legal wagering
have been handled ever since the founding of this Republic and
we believe should be continued to be resolved that way in the
future.
As the National Gambling Impact Study Commission reaffirmed
in its final report in 1999, except for certain limited areas,
such as internet gambling and Native American gaming, States,
not the Federal Government, should decide whether to permit
legal wagers by persons within their States, and if so, how to
license those in the wagering business and how to tax and
regulate their operations.
Our major concern with internet gambling as it exists today
is that it allows offshore websites that accept bets and wagers
to frustrate important State policies, including restrictions
on the availability of gaming within each State. Similarly,
unregulated internet gaming that exists today allows an
unlicensed, untaxed, unsupervised operator to engage in
wagering that is otherwise subject to stringent Federal and
State regulatory controls. These controls are vital to preserve
the honesty, integrity and fairness that those in the gaming
industry today have worked so hard for so long to bring about.
The importance of this concern cannot be overstated. As the
U.S. Department of Justice has stated before Congress on
several occasions, the law should treat physical world activity
and cyber activity over the internet in the same manner,
whether it comes to gambling or otherwise. As the Justice
Department pointed out in testimony to the Senate Indian
Affairs Committee in 1999, and I quote, ``If activity is
prohibited in the physical world but not on the internet, the
internet will become a safe haven for that criminal activity'',
unquote.
In addition to State level restrictions on where legal
wagering may take place, and extensive licensure and regulation
of those who engage in the business of taking legal wagers,
there are important Federal requirements applicable to
commercial casinos and other forms of legal wagering in this
country. For example, U.S. commercial casinos are subject to
Federal corporate taxation. Publicly traded companies comply
with financial disclosure and other Securities and Exchange
Commission rules. Casinos file information reports on larger
winnings with the IRS and withhold Federal taxes on certain
winnings.
And casinos, very importantly, adhere to anti-money-
laundering statutes and regulations administered by the U.S.
Treasury Department's FINCEN Division. By contrast, those
engaged in the business of illegal internet wagering in the
U.S. from offshore are not subject to U.S. law enforcement
jurisdiction on these important matters of public
administration.
Now while the AGA could support appropriately drafted
legislation to update Federal statutes to preserve the
traditional policy of State regulation, any changes to Federal
or State laws in the pursuit of making internet gambling
illegal need not and should not be drawn so broadly as to lump
the use of technology within otherwise legal limits in the same
prohibited status as those who are doing so outside State law.
This position is consistent with the policy of the Wire
Communications Act, which since the 1960s permits the use of
the wires for wagers and information, assisting in the placing
of wagers, where the transactions are entirely intrastate or
between States in which the wagering in question is legal.
In other words, there is a difference between using
technology to circumvent Federal and State restrictions and
regulations as is done today by those operating offshore
internet gambling sites, and the use of technology by licensed
operators to more efficiently deliver their services where, to
whom, and under what conditions they are authorized by Federal
and State law to do so.
There are clearly understandable enforcement concerns that
this subcommittee must deal with. But it is important also to
point out that the commercial casino industry has been at the
forefront of tackling the difficult problem of pathological
gambling that some of the other witnesses have testified to.
The National Gambling Impact Study Commission actually
commended our industry for its work in being the primary funder
of research on this disorder. And I ask you to go back and look
at that Commission report. A lot of people have been throwing
things around like bankruptcy and crime and suicide and
divorce. That's not the findings of the National Gambling
Impact Study Commission, except to that 1 percent of the
population who are defined as compulsive and pathological
gamblers.
The position of the AGA is that we continue to oppose
unregulated internet gambling, because we believe the
technology does not currently exist to prevent underage
gambling, to protect against pathological gambling, and to
permit the strict regulation and law enforcement oversight
required for integrity.
Thank you very much, Madam Chairwoman.
[The prepared statement of Frank Fahrenkopf can be found on
page 137 in the appendix.]
Chairwoman Kelly. Thank you very much. And thank you for
staying within the time limit.
I want to just ask a couple of questions. We are going to
ask a few questions, then we are going to go vote. We will come
back to finish.
Mr. Suarez, as I understand it, during your investigation
of offshore internet gambling, 15- and 17-year-old kids were
able to set up accounts and place bets from computers in New
Jersey. Is there anything we can do to prevent minors from
having access to an offshore casino?
Mr. Suarez. Madam Chairwoman, we were able to have those
underage kids gamble. And the real obligation to do that
screening really falls on the operators themselves. In these
cases that we had, we had the children enter their correct
birth dates. And on two of the sites, they were told--the site
reported back that they were underage, and changing only the
age description in the field, the child simply said, ``I'm
21'', and he was allowed to wager and place wagers on those
games.
In the other circumstance, we were actually just told,
don't come in if you're under 18, and we clicked on the screen,
``I agree that I am over 18'', and we got right in. There is
nothing except for the technology that may permit parents to
screen certain ISPs or certain home pages that could be done.
But the operators can simply avoid that by identifying their
screen in a different way.
The screening software, the nanny software, requires
cooperation from the operator and the parents.
Chairwoman Kelly. Thank you. I just want to follow up with
one question about the fact that law enforcement authorities
have talked with me and raised some concerns about the
potential for money laundering and other financial crimes in
connection with internet gambling. Can you explain how internet
gambling lends itself to money laundering?
Mr. Suarez. Probably the easiest way that we can see it is
that there is no guarantee on the side of the house, the
internet casino, that they are complying with the reporting
requirements of Federal law, be that for cash deposits, cash
transactions, or the movement of money to and from other
accounts that may be offshore through to the accounts
themselves.
The most common way that an internet casino pays a wager is
that they can credit up to the amount that a person originally
put down, then they send a check in the mail. And so there is
no way that we in the United States can track how many
transactions, where the money is coming from, any paper trail
that we can go to to these internet sites, because we simply
don't have the ability to capture the information or to
guarantee that those casino sites, internet sites, are properly
capturing information that they would be required to capture
were they a land-based operator.
Chairwoman Kelly. Thank you very much. Dr. Lorenz, I would
like to know if you would be willing to share with us, in
generalities if necessary, any cases that you have worked with
involving internet gambling.
Dr. Lorenz. Yes, Madam Chairwoman, I can tell you of a
current case. This is a police officer who served very
commendably in a nearby county, a very large county, also very
large police department. He had a very stressful job, and he
went to gambling on the internet in order to relieve that
stress.
I had hoped to bring him here today, but he is facing legal
charges, and his attorney suggested it was not a good idea at
this time. You can imagine that this police officer is
extremely embarrassed because the men he worked with for 30
years now have to arrest him and take him to prison.
I have a paper here. We have our patients fill out a
sentence completion form. Let me just read some of the
sentences that he completed. ``I think gamblers are''--and he
says, ``sick people who haven't realized their sickness.'' And
that is very true.
``I am fearful of my future until I get help.'' This is a
man who for 30 years was a police officer. ``I am not going to
commit suicide,'' although he had tried, and the last thing
that stopped him is that his fellow officers would find him.
``Most people don't know that I tried to stop gambling many
times.''
Question five: ``The most unusual experience I have ever
had while gambling,'' was using other people's money. He stole
over $100,000 from his police department.
Question six: ``People who see me when I am gambling think
I am just playing on the internet.''
Chairwoman Kelly. Thank you, Dr. Lorenz. I appreciate that.
Dr. Lorenz. One more question? One more statement?
Chairwoman Kelly. I've run out of time. I appreciate it. I
am going to turn to Mr. Gutierrez, and if you would like to
continue this, please do.
Mr. Gutierrez. Sure. I just have a couple of questions to
Mr. Peter Suarez, John Peter Suarez.
In Mr. Fahrenkopf's written testimony, he basically says
that he's not concerned about internet gambling in terms of
competition from internet gambling because he cites that they
go for the hotels and all the excitement and everything else
that goes along with gambling.
However, you have mentioned in your remarks that the rise
of internet gambling could threaten the success and reduce
revenues of those strictly regulated casinos in Atlantic City.
Could you explain the difference?
Mr. Suarez. New Jersey's gaming market is unique in that
gaming in New Jersey is limited to the city of Atlantic City
and cannot take place anyplace else. So if you want to gamble,
you must come to Atlantic City to one of the 12 licensed
casinos, unlike Nevada, where gaming is pervasive throughout
the State. I don't want to speak for Mr. Fahrenkopf, but I
believe that is the distinction in that the operators in New
Jersey have committed substantial resources and investment in
developing Atlantic City.
And for a patron who ordinarily would drive down the
parkway or the Atlantic City Expressway to come, if they could
avoid that by simply logging on, then I think by all accounts,
we don't know the extent of the impact, but I think we all
recognize that there would be a negative impact in the gaming
market in New Jersey.
Mr. Fahrenkopf. Mr. Gutierrez, the average stay in Atlantic
City is something like 10 hours. The average stay in Las Vegas
is 3 days.
Mr. Gutierrez. OK.
Back to Mr. Suarez. If prohibition of internet gaming was
chosen as the course of action by the State or Federal
Government, how could this prohibition be enforced?
Mr. Suarez. The prohibition would have to be accompanied by
the tools that you have identified, which is, as the National
Gambling Impact Study Commission recommended, to simply make
wagers that are placed over the internet and the obligations
associated with those uncollectible in the United States. That
simple declaration of policy and laws to that effect would
render I think the profitability of internet gaming--it would
render it virtually unprofitable if an operator could not
effectively come to the United States and try to collect that
debt, because that debt is unenforceable in the courts in the
United States.
Mr. Gutierrez. And following up with Sebastian Sinclair, if
prohibition as you've emphasized throughout your written
statement, would be very hard to enforce, and you suggested,
quote, ``may be a poor policy choice for internet gaming'',
then what would be the right, foolproof choice for the
Government to protect individuals interested in internet
gaming.
Mr. Sinclair. Well, I think I answered that when I stated
that there is no foolproof answer as I see it.
This legislation assumes a debt-based transaction. Credit
cards are not the medium for this industry, and they never will
be, because gambling debts already are uncollectible in a great
portion of the First World, the State of Michigan, for
instance. You'll simply be pushing it to different mediums of
exchange.
Now the way I see it, as I said before, keep your friends
close and your enemies even closer; there is no good answer,
but there is a lesser of two evils. And I think a real concern
and a real problem that is associated with gambling is problem
and pathological gambling as we've heard about a lot on this
subcommittee.
But it is my opinion and my belief that by trying to
prohibit this activity in a way very similar to the Volstead
Act, the cure will be worse than the disease. You can't
legislate away demand, and on the internet, it's difficult to
legislate away supply. You're going to hand this industry to
suppliers who aren't concerned about problem and pathological
gambling, and it's going to maintain.
Mr. Gutierrez. Well, we don't want to gamble any more with
the time we have to go vote. I think we have 4 minutes and
we're both pretty healthy and swift, but let's get over there
to vote. We'll be right back. Thank you.
Chairwoman Kelly. Thank you. We will take a 10-minute break
and resume.
[Recess.]
Chairwoman Kelly. Thank you very much. I apologize for such
a long delay. May we have our witnesses back?
I understand Mr. Fahrenkopf had to leave. We will have to
give him some written questions. But since I have completed my
questions, with unanimous consent, Mr. Leach, would you like to
open your line of questioning?
Mr. Leach. I don't have exactly any questions for the
panel, but I would like to read a very brief long sentence or
two sentences, because it relates to some things that have been
said with regard to several of the comments about the
possibility that third party intermediaries such as PayPal may
obviate the effectiveness of legislation like H.R. 556 that
makes it illegal to use financial instruments for illegal
internet transactions. Let me be clear that H.R. 556 also makes
it illegal to use the proceeds of credit or to extend credit on
behalf of any other person or to use the proceeds of any
financial transaction for illegal gambling.
What this means is that third party intermediaries like
PayPal would be captured under the enforcement mechanisms of
the Act. Now PayPal kinds of transactions would be treated the
same as direct credit card transactions. And I just want to
stress that this particular kind of effort to get around the
prohibitions of the Act, I don't think, would be very
effective.
Second, several people have asked me something about my
opening statement that related to the Visa testimony to come.
And we are going to be under some very awkward time constraints
on some voting. So let me just make it clear what I was getting
at. I am nothing less than astonished that a credit card
company, of all kinds of companies, would testify that it
objects to these kinds of payment mechanism approaches. Because
what is at issue here for credit card companies is not simply
the legal subtleties of how you comply, but the fact if you
don't have this situation, you are going to massively increase
the number of bankruptcies in America. You are going to
massively increase the number of credit card indebtedness, and
nothing could be less advantageous to the vested interest of a
credit card issuer. And so it is my personal view that of
testimony I have read, I have never seen testimony that is less
in the vested interest of the party that is projecting it.
And having said that, I would also say, I am absolutely
astonished at the lack of interest to date of the financial
intermediary community. And by that I mean America's banks,
America's savings and loans, America's insurance industry.
Every single one of these industries has a spectacular interest
in not seeing the problems in American society that are
beginning to evidence themselves.
I cannot think of a higher priority for the American
banking industry than legislation of this nature. And it is
just extraordinary the silence that has greeted it, both in the
last Congress and this Congress. And I think that the American
Bankers Association, the Independent Bankers Association, the
insurance industry have really got to look at these
circumstances and come to a conclusion what's in the best
interest of American society and what's in the best interest of
the financial well being of American civic life. And I think we
have to be very concerned.
When the Chair reads a statistic that says that a million
people gamble a day, I would stress in a society of about 300
million people, that that isn't 1 million people one day and
another million people the next, it is a million people that
repeat and repeat and repeat. And given the odds that exist in
gambling, the greater the amount of volume of gambling, the
greater certainty is of the greater the loss. The odds are
against the public. And I think it's an absolute duty of the
United States Congress to say that the public ought to be
protected from odd circumstance that are stacked against it.
And I want to say to this panel, I am very appreciative of
the testimony of many of you who are deeper into this subject
than I have ever been and have seen first-hand results of a
very deep nature.
But my concern, Madam Chairwoman, is that the horse is out
of the barn. The question is, can we get it back in? And if we
don't get it back in, what kind of wagon it's going to be
dragging with us in the years ahead. And I think it's up to the
United States to lead. I think it's up to the United States to
lead for ourselves and in the international community with
approaches of this nature. And I don't know any other approach
other than payment mechanism approaches that are effective on
enforcement and that can be replicated easier in other
countries in the world. And that is why to me it is so
important.
Beyond that, I don't have any questions for this panel,
because this panel has been so forthcoming and direct and
thoughtful in their presentations to the subcommittee. And I
want to thank you very much, Madam Chairwoman.
Chairwoman Kelly. I thank you, Mr. Leach.
There are obviously no more questions for this panel, and I
really thank you for your indulgence for the long wait that we
had. It was unexpected. Since there are no more questions for
the panel, the Chair notes that some Members may have
additional questions, and they may wish to submit those in
writing. Without objection, the hearing record is going to
remain open for 30 days for Members to submit written questions
and witnesses to place their responses in the record.
Oh, Mr. Goodlatte, you just got here? Do you have--all
right. Thank you.
I want to again thank this panel for their time and
patience with us. The first panel is excused with the
Subcommittee's grateful, grateful gratitude. And we are going
to take just a quick break so that we can have the second panel
take their seats. Thank you all very much.
[Recess.]
Chairwoman Kelly. For our second panel, we are very
grateful that Mr. Bill Saum could join us. He is the Director
of Agent Gambling and Amateurism Activities for the National
Collegiate Athletic Association. He is going to discuss the
effect of internet gambling on amateur sports, the integrity of
the games, and the athletes.
Next we are going to hear from Mr. Mark MacCarthy, the
Senior Vice President of Public Policy for Visa U.S.A.,
Incorporated, who will discuss the challenges to the credit
card industry with internet gambling and the accompanying
credit card use.
Then we are going to hear from Ms. Sue Schneider. She is
the Chairman of the Interactive Gaming Council, which
represents manufacturers and licensers of software used to
enable internet gambling to function.
Then we are going to have Ms. Penny Kyle, the Executive
Director of the Virginia Lottery and the President of the
National Association of State and Provincial Lotteries. She
will share with us the perspective of the State lotteries.
And finally, we will hear from Mr. Greg Avioli, the Deputy
Commissioner of the National Thoroughbred Racing Association,
who will share with us the perspectives of the horseracing
industry.
I want to thank all of you for taking time out of your
schedules to be here with us today and to share your thoughts
with us, and I certainly do thank you for your patience in
waiting to appear on this panel. Let us begin with you, Mr.
Saum.
STATEMENT OF BILL SAUM, DIRECTOR, AGENT GAMBLING AND AMATEURISM
ACTIVITIES, NATIONAL COLLEGIATE ATHLETIC ASSOCIATION
Mr. Saum. Madam Chairwoman and Members of the Subcommittee,
thank you for the opportunity to testify on behalf of the
National Collegiate Athletic Association and to share with you
our concerns related to the growth and impact of sports
gambling on the internet.
The NCAA is a membership organization consisting of nearly
1,000 universities and colleges and is devoted to the
regulation and promotion of intercollegiate athletics for over
300,000 male and female student-athletes.
Though the growth of internet gambling has seemingly
sprouted overnight, this is not a new issue for the NCAA. For
the past 4 years, we have worked with House and Senate sponsors
in an effort to adopt legislation that would in part ensure
that all sports gambling on the internet is prohibited in this
country. Why? The answer is quite simple. When people place
wagers on college games, there is always the potential that the
integrity of the context may be jeopardized and the welfare of
the student-athletes may be threatened. For example, many of
you are aware of the recent point-shaving scandals on the
campuses of Northwestern University and Arizona State
University. While these cases occurred before the rise of the
internet gambling industry, the impact of these sports gambling
incidents must not be minimized. Many, many dollars were
wagered on these games. The result? Several of the student-
athletes involved were indicted and sentenced to time in a
Federal prison. Coaches and teammates were betrayed, and the
two schools have seen their reputations tarnished. It is clear
that sports gambling is not a victimless crime and that the
potential for similar incidents to occur has increased now that
sports bets can be placed on the internet.
Perhaps the most frustrating aspect of internet gambling is
that while we all acknowledge the wondrous benefits of the
internet age, it also has presented some significant
challenges. Today this new communications medium, the internet,
allows online gambling operators to circumvent existing U.S.
laws aimed at prohibiting sports gambling. This is why we
believe that new Federal legislation is needed to address the
rapidly transforming world of gambling in cyberspace.
As you listen today to witnesses arguing the pros and cons
of internet gambling, please do not overlook the potentially
harmful impact of this activity on young people. A growing
consensus of research reveals that the rates of pathological
and problem gambling among college students are three times
higher than the adult population. This fact surely did not go
unnoticed when the National Gambling Impact Study Commission
recommended a Federal ban on internet gambling in June of 1999.
Just 4 years ago, when the NCAA became involved in the
legislative effort to ban internet gambling, there were only
four dozen internet gambling sites. Now there are 1,4000 unique
internet gambling websites. Today college students are perhaps
the most wired group of individuals in the United States. They
can surf the web in their school library, in the computer lab,
or in the privacy of their dorm room. The emergence of internet
gambling enables students to wager behind closed doors,
anonymously, and with the guarantee of privacy. Furthermore,
the ease and accessibility of internet sports gambling creates
the potential for student-athletes to place wagers over the
internet and then attempt to influence the outcome of the
contest while participating on the court or playing field.
If left unchecked, the growth of internet gambling could be
fueled by college students. Today college students are armed
with the means to gamble on the internet. A year 2000 study by
Nellie Mae indicates that 78 percent of college students have
credit cards. Thirty-two percent have four or more, and that
the average debt for these undergraduates is approximately
$2,750 per card.
In my position as the NCAA Director of Agent, Gambling and
Amateurism Activities, I have seen how students are falling
victim to the lure of internet sports gambling. Offshore
operators continue to implement aggressive marketing tactics.
There are billboards promoting internet gambling sites across
the country. Student-athletes continue to complain about
receiving unsolicited e-mails for sports gambling websites. And
there have been reports of individuals passing out flyers
touting internet gambling opportunities at fraternity houses.
I have spoken with students who have lost thousands of
dollars on the internet. In fact, last year at a congressional
hearing, we played a videotape account of a college student who
in just 3 months lost $10,000 gambling over the internet.
Please be assured that this is not a unique experience. We have
heard from others with similar stories.
Finally, our staff is beginning to process NCAA rule
violation cases involving internet sports gambling. On the
legislative front, the past four years have been marked by
frustration. Those supporting efforts to adopt the legislation
have come very close to achieving their goal, but in the end
have been thwarted by aggressive and well-financed opposition.
The real challenge in crafting legislation----
Chairwoman Kelly. Mr. Saum, you have run out of time. Can
you summarize, please?
Mr. Saum. Yes. The real challenge in crafting legislation
that will not only address the problems associated with
internet gambling but also provide an effective enforcement
mechanism will have an impact on these offshore operations. The
NCAA urges the Subcommittee and Congress to not let this
opportunity slip away, and thoughtful legislation may be
successful in significantly curtailing this growth and
popularity of internet gambling in this country. Thank you.
[The prepared statement of Bill Saum can be found on page
146 in the appendix.]
Chairwoman Kelly. Thank you very much.
Mr. MacCarthy.
STATEMENT OF MARK MacCARTHY, SENIOR VICE PRESIDENT PUBLIC
POLICY, VISA U.S.A. INC.
Mr. MacCarthy. Thank you, Chairwoman Kelly and Members of
the Subcommittee.
The Visa Payment System is the largest consumer payment
system in the world. The over one billion Visa cards issued by
our 21,000 members are accepted at over 20 million locations.
Chairwoman Kelly. Mr. MacCarthy, can you pull that
microphone a little more closely to you, please?
Mr. MacCarthy. Is that better?
Chairwoman Kelly. Thank you. Much better.
Mr. MacCarthy. The over one billion Visa cards issued by
our 21,000 members are accepted at over 20 million locations to
buy over $1.8 trillion worth of goods and services every year.
In the U.S. alone, cardholders use Visa cards to buy over $90
billion worth of goods and services.
Visa recognizes that internet gambling can raise important
social issues, especially access by problem and underage
gamblers. Also, while internet gambling represents only a
negligible part of our total transactions, it imposes
disproportionate legal and operating risks for Visa and for its
members.
So Visa has taken steps to address internet gambling. Visa
card issuers must advise cardholders that internet gambling may
be illegal in their jurisdiction and that Visa cards should
only be used for legal transactions.
Visa also cooperates with law enforcement agencies in their
efforts to prosecute illegal domestic internet gambling
operations. And Visa has taken steps to enable card issuers to
block potentially illegal internet gambling transactions.
Visa requires internet gaming merchants to use a
combination of codes that tells the card issuer that a
transaction is likely to be an internet gambling transaction,
and this allows a card issuer to deny authorization for these
transactions. The sheer volume of transactions that Visa
handles requires it to rely on this merchant code. The Visa
operating system operates at a pace of 35.5 billion
transactions per year. Visa processes an average of 2,500
messages per second and has a peak capacity of 4,000 messages
per second.
Our coding system has limitations. For it to work,
merchants must accurately code transactions. Visa merchants are
required to properly code, and there are penalties for failures
to do so, but there are obvious incentives for unscrupulous
internet gambling merchants, to try to hide from Visa and from
its members.
Coding only informs card issuers that the transaction is
likely an internet gambling transaction. It does not tell us
whether the transaction is illegal. For example, U.S.
cardholders visit foreign countries where internet gambling is
authorized and where the use of credit cards to pay for online
gambling is entirely legal. Online gamblers often use
electronic cash for auctions, online purchases or for internet
gambling. The coding system that Visa uses would not capture
these transactions as internet gambling transactions.
We believe that partly as a result of these efforts, these
alternative forms of payment are becoming a payment system of
choice for internet gambling. I was pleased to notice that
other witnesses have made this same point in their testimony.
Under current law, it is impossible to determine quickly
and efficiently whether a particular internet gambling
transaction is illegal. Part of the problem is ascertaining
exactly where a cardholder originates the transaction.
Going forward, we believe that the responsibility for
illegal acts should be placed squarely on the shoulders of the
illegal actors themselves--the gamblers and the casinos that
engage in illegal gambling operations. Making payment systems
responsible for policing internet gambling does not provide a
practical and effective solution for this complex social
problem. And it is hard for us to see how Congress can address
payment systems and internet gambling without clarifying the
underlying legal landscape. A law that makes all internet
gambling illegal would be hard for us to enforce and would
raise significant cross-border jurisdictional issues.
But the fundamental point is that if policymakers declare
internet gambling illegal, unscrupulous merchants will simply
stop coding their transactions accurately, and we will have no
way of knowing which transactions are internet gambling ones.
Conversely, a more complex law that allows for multiple
exceptions for a ban on internet gambling, such as allowing
internet gambling on an intrastate basis or permitting certain
types of gambling, such as parimutuel betting, would be
impossible for us to enforce. No coding system could possibly
reflect all these variations.
Thank you for the opportunity to testify before you today,
and I would be happy to answer any questions.
[The prepared statement of Mark MacCarthy can be found on
page 155 in the appendix.]
Chairwoman Kelly. Thank you very much, Mr. MacCarthy. You
have certainly given us some food for thought.
Ms. Schneider.
STATEMENT OF SUE SCHNEIDER, CHAIRMAN, INTERACTIVE GAMING
COUNCIL
Ms. Schneider. Madam Chairwoman and Members of the
subcommittee, I have served as the Chairman of Interactive
Gaming Council since its formation in 1996, and I would like to
applaud you for holding this hearing to learn more about this
very complex subject and to really educate yourselves about the
public policy issues that are opened here. It is a situation
where it is very complex. It is international in nature and can
be very complicated.
The IGC itself is a not-for-profit trade association with
over 100 member companies from around the world. These are
companies that are operators, software suppliers, e-commerce
providers, or like my own company, we provide information
services.
The mission of the organization is to provide a forum for
what we consider to be the legitimate participants in the
industry to work toward uniform standards for those
participants on an intergovernmental basis and to provide a
unified voice to advocate for the interests of both the members
and the consumers who enjoy our services.
I have included in the appendix some things that I think
you might find of interest: A Code of Conduct, Responsible
Gaming Guidelines, and most recently, a Seal of Approval
program that has been adopted by the IGC, and members are
beginning to participate in that.
We feel that neither governments nor consumers will
tolerate an industry that doesn't extend adequate protections
to its consumers, and I think that's something where we agree
with policymakers, is how do you extend those protections? I
can tell you from having worked with an information publication
that was consumer-oriented, consumers are concerned about two
things: Are the games fair? Is their betting fair, and will
they get paid? And those are the common things that they are
most concerned about. And it is something that again takes
international exposure and cooperation here.
What we are not are an association of members who set up
shop, take off with the dollars and run. And quite frankly,
there have been very few instances of that in an industry
that's been having the kind of growth that has existed over the
last few years.
We are also not unaware of and not insensitive to the
issues of underage or problem gambling. And quite frankly, some
of the technology that exists allows for the kind of tracking
of that, particularly when it comes to some of the issues of
compulsive gambling, loss limits, self-exclusionary type of
things, a variety of things like that, which we can get into
more in the question-and-answer session if you would like to
learn more about that.
As we mentioned, there are at least 54 jurisdictions around
the world that offer sanctioned internet gambling in some way,
and we have included that list in there also. Countries such as
Great Britain and South Africa are now exploring regulatory
structures. And again, we work with the international body of
gaming regulators to look at baseline standards so that there
is some consistency there.
As you are likely aware, Nevada, for example, and even New
Jersey have had legislation introduced, and Nevada passed to
allow for regulatory structure if they can be guaranteed that
certain controls are in place.
I have added some information on the size of the industry
and again, I think Sebastian covered that quite a bit, so I'll
move by that.
But I do want to say again to reiterate that the demand is
within the U.S. in terms of the market for these services. And
I think what that does is really make the public policy issues
even more of a challenge. But among those, we feel that both
the State versus Federal oversight, those tensions on who does
have oversight of this, is something that needs to be openly
discussed. Looking at the location of where the gambling
transaction takes place and the jurisdictional issues there,
and again, trying to get some harmonization of regulations.
I think the whole issue of the financial transactions is
something that we have to look at very carefully. Do you want
to be a chokepoint and really put out to the international
world that that sort of thing happens. I know there's a lot of
inconsistencies to a certain extent when you look at like the
French Yahoo case that some of you may be familiar with. Some
of those kind of issues, you get into that interplay of trying
to control a medium that has been set up to not be controlled.
And those are the kind of concerns that I think are of essence
as you look at using financial transactions as a control point.
And as you have also heard, that the whole issue of coming
up with more anonymous e-cash services as a result of those
kind of restrictions are something that will probably be a
reality there.
I do want to mention that there are two things that I would
ask that you keep in mind. One, as we've mentioned before, the
Volstead Act, and trying to curb demand in that regard when you
have some people, a number of people in America that are
looking at that as an opportunity for an entertainment that
they want to take advantage of. And I think the other thing to
look at is how Las Vegas has evolved. It started out, you know,
you talk about the Wild West. That was the Wild West there, and
it has now evolved through a regulatory structure that has been
I think a benefit to consumers, and that's what we want to
advocate for.
Thank you very much.
[The prepared statement of Sue Schneider can be found on
page 169 in the appendix.]
Chairwoman Kelly. Thank you very much, Ms. Schneider. I
apologize for cutting you off and cutting you short on your
testimony, but you know your written testimony is already a
part of the record, and we will be asking questions.
Ms. Kyle.
STATEMENT OF PENELOPE W. KYLE, EXECUTIVE DIRECTOR, VIRGINIA
LOTTERY; PRESIDENT, NATIONAL ASSOCIATION OF STATE AND
PROVINCIAL LOTTERIES
Ms. Kyle. Good afternoon, Madam Chairwoman, Congressman
Leach and Congressman Goodlatte. My name is Penny Kyle, and I
am serving this year as the President of the North American
Association of State and Provincial Lotteries. This is the
group that represents every U.S. lottery, of which there are
now 39; the six provincial lotteries of Canada, the National
Lottery of Mexico, and the lotteries in the Virgin Islands,
Puerto Rico, and Jamaica.
I am here today, first of all, to tell you that the 39 U.S.
lottery directors actively support what this subcommittee is
trying to do. We think that the issue of addressing illegal and
unregulated internet wagering needs to be undertaken, and we
applaud your efforts.
As State lottery directors, our members operate under some
of the most stringent legal and security standards in the
world. And we do this because as State governments, we believe
it is in our best interest if we are to maintain the high level
of public trust that we currently have with our citizens in our
various jurisdictions.
Therefore, your efforts to outlaw illegal internet
operations are welcomed and supported by those of us who
currently adhere to the legal wagering rules.
It should be noted that this organization has not taken a
for or against position regarding the sale of lottery tickets
on the internet. We feel this is a position that must be taken
by each of the individual States to determine the forms of
regulating its own gaming as well as the methods that are
offered in that State.
My goal in appearing before your subcommittee today is to
make one key point to you. That is that NASPL cannot support
any internet legislation that would preempt the right of the
Nation's governors and State legislators to either prohibit,
authorize, or regulate gaming within their own borders.
Since the inception of the first modern lottery in New
Hampshire in 1964, State meeting governments have had the right
to authorize and regulate their State lotteries. They write
billions of dollars for good causes, such as education, the
environment, and senior citizen programs.
We stand by the statement made by the National Governors'
Association, and I quote as follows:
``States possess the authority to regulate gambling within
their own borders and must continue to be allowed to do so. An
incursion into this area with respect to on-line gambling would
establish a dangerous precedent with respect to gambling in
general as well as broader principles of State sovereignty.''
It should be noted that there are several State lottery
members of NASPL who are opposed to offering State lottery
products over the internet. These States feel very strongly
about this issue and would oppose any attempt to authorize any
such games.
On the other hand, there are some NASPL State lottery
members who feel that there may come a time in the future when
it is appropriate to offer such games. I make this point,
Madame Chairwoman, to illustrate an important common theme
among our membership. All of us may not agree on the value or
the appropriateness of offering lottery products on the
internet, but we are united in the belief that it is clearly
each State's right to authorize and regulate its own lottery
and the methods of selling its own lottery products.
In conclusion, I would ask that this subcommittee and other
relevant congressional committees, while addressing the issue
of illegal and unregulated internet gaming, please respect the
historical right of States to authorize and regulate gaming
within their own boundaries.
I thank you again for allowing me to represent the views of
the North American Lottery Industry.
[The prepared statement of Penelope W. Kyle can be found on
page 185 in the appendix.]
Chairwoman Kelly. Thank you very much, Ms. Kyle.
Mr. Avioli.
STATEMENT OF GREGORY C. AVIOLI, DEPUTY COMMISSIONER, NATIONAL
THOROUGHBRED RACING ASSOCIATION
Mr. Avioli. Thank you, Madame Chair.
I'm testifying today on behalf of the National Thoroughbred
Racing Association which is the national organizing body for
the sport of thoroughbred racing, which represents the
interests of racetracks, owners, and breeders. Horseracing and
breeding in the United States is a major agri-business. It
currently employs nearly 500,000 full time employees and has an
annual economic impact of over $34 billion on the U.S. economy.
Wagering on horseracing is permitted in 43 States and
generates over $500 million each year in State and local taxes.
Racing is also a very popular spectator sport, with over 30
million fans coming to the races last year and that's second
only to major league baseball.
Prior to 1970, wagering was only available to patrons who
were live at the racetrack. In 1970, the New York Legislature
authorized off-track wagering. Since that time, all 43 racing
States have authorized the tracks in those States to send
pictures of their races to other States. That's a process known
as simulcasting.
As part of the growth of simulcasting, racing improved its
product by starting a process known as ``common pooling'' where
they would combine many betting pools in one or more
jurisdictions. This process uses sophisticated computer
networks and now relies heavily on the internet to transmit the
information.
Another technological advance for racing over the last few
decades was the development of advanced deposit or account
wagering where a person can set up an account with a licensed
facility and then wager from another location. Currently, 11
States have authorized this account wagering.
I bring this up because racing's use of modern technology
I've just described has allowed the racing industry, and the
$34 billion agri-business it supports, to survive in a very
competitive gaming environment.
As a statistic, about 50 years ago, racing had 100 percent
of the legal gaming market in the United States. As we sit here
today, it's less than 5 percent. Throughout history, the
prohibition or legalization and regulation of gaming has been
primarily left to the States and not to the Federal Government.
In this regard, wagering has been regulated on the State level
for 75 years.
In 1978, the State regulation of horseracing was
supplemented by the Federal Government in a very specific way
with the passage of the Interstate Horseracing Act of 1978. In
that Act, Congress stated in its congressional findings that it
is the policy of Congress to regulate interstate commerce with
respect to wagering on horseracing in order to further the
horseracing and legal off-track betting industries in the
United States.
Just last year, Congress amended the Interstate Horseracing
Act to clarify that interstate simulcasting and account
wagering can be conducted via telephone or other electronic
means which would include the internet where lawful in the
States involved. This was just in the last Congress.
Again, similar to the other speakers you've heard today,
our industry feels very strongly that the regulation of all
forms of gaming is essential to protect the public and assure
compliance with applicable laws. We are adamantly opposed to
any unregulated gambling whether via the internet or any other
medium.
In the last decade, the internet has been used by offshore
unregulated entities who have pirated money from licensed
racetracks in the United States. These operations are able to
offer more attractive betting propositions because they don't
pay U.S. taxes and they don't pay the revenue shares that
currently go back to support racing and purses in this country.
It's been estimated that this year, as much as $750 million
of what otherwise would be a total of $15 billion will be
wagered offshore. That is a $750 million gaming loss to the
licensed industry in the United States.
In light of the posed threat to our industry from internet
gambling, we have supported a number of congressional
initiatives in the last few years to curb illegal internet
gambling. We've worked closely with Congressman Goodlatte last
year. As a result of participating in the legislative process,
however, we are aware that any legislation dealing with this
issue will have very technical legal issues, and we are
concerned that imprecisely or improperly drafted legislation
could have an unintended effect.
For example, some legislation last year, without intending
it, would have outlawed the legal business of simulcasting,
which had nothing to do with the internet, but because
computers that were included in the definition of the internet
are used in simulcasting, that bill would have, on its face,
outlawed the core business that we have today.
That's a good ending point.
[Laughter.]
[The prepared statement of Gregory C. Avioli can be found
on page 190 in the appendix.]
Chairwoman Kelly. Thank you very much.
I'm going to ask one question very quickly.
I would like to ask Mr. Saum about whether or not you are
aware of a study that was done by the student journalists at
Santa Clara University that came up with numerous instances of
students racking up huge credit debts gambling. Some of this
apparently was done on the internet.
I have here a story that the students wrote, and I'm going
to request that it be made a part of the hearing record.
[The information referred to can be found on page 41 in the
appendix.]
Chairwoman Kelly. Are you aware of this and would you like
to elaborate on that?
Mr. Saum. Yes, ma'am, we are aware of it. We've been in
communication with a few of the authors of this article, and
it's fascinating from the stance that they actually began as a
report for one of their classes, they began by sharing some of
their own stories, and then they went out and started
interviewing other students in the Silicon Valley area. From
one student, they expanded it to other students, and the
stories that they heard were rather alarming. They heard the
stories of the easy access to the internet, the easy access
using their credit cards. When they maxed out their credit
cards, they were given new credit cards and from there the debt
rose to the level of thousands of dollars. And several of the
kids were in the tens of thousands of dollars area.
Chairwoman Kelly. Thank you very much.
I want to know, I have one other question here. Mr. Suarez
indicated--and this is a question for Ms. Schneider--Mr. Suarez
indicated that 15- and 17-year olds were able to access
offshore internet gambling sites during an investigation that
they conducted. Yet, I see that one of the items in your Code
of Conduct says that members will institute controls that
require customers to affirm that they are of lawful age in
their jurisdiction, and that they will institute reasonable
measures to corroborate that information. It sounds like some
of the offshore sites are not complying with your code.
My question really is whether or not there is any way to
design software in such a way that you're going to be able to
exclude money laundering and kids from using the site. These
people who are non-compliant, are they members of your IGC?
Ms. Schneider. The three they had targeted are not members.
This is the problem with a voluntary trade association, quite
frankly, is you can't get 100 percent of the people in. That's
why regulation is an optimal solution in that regard.
In terms of what you can do in terms of underage gambling,
what a number of operators do is go through kind of a vetting
process. When you open an account, they can require and do
require copies of passports or birth certificates or that sort
of thing, to be able to get a sense of documentation of the age
of that particular player.
Down the road, there are things coming now in terms of
biometric encryption tools to make sure that the person that
established the account is indeed the person that's playing. So
you do have a situation there where there are technological
tools that are being developed now that will assist with that.
Mr. Leach. [Presiding] Thank you very much.
Mr. Goodlatte, do you have any questions?
Mr. Goodlatte. Thank you, Mr. Chairman.
Ms. Schneider, let me follow up on that question. Are you
saying that everyone of your 100-member organizations presently
requires submission of some kind of documentation, like
passports or birth certificates, before they will allow anybody
to obtain membership or whatever you require, each one of those
organizations requires to bet on-line?
Ms. Schneider. I'm not saying that. Number one, not a
hundred of the members are all operators.
Mr. Goodlatte. Of the ones that are operators.
Ms. Schneider. I can't say with any certainty. I think you
have the same problem in the hearing that came up last year
with the racing industry in terms of whether they were all
compliant with taking wagers only from those 8 States.
When you have a volunteer association, you can't do it.
It's something we would hope for.
Mr. Goodlatte. Have you checked on that?
Ms. Schneider. Have we checked on it? We know that the
leading ones that do a big volume do have those kind of
controls in place.
Mr. Goodlatte. If you are capable of doing that to screen
out people who are minors, you would similarly, from the same
information provided to you, have the ability to screen out
people who are placing those bets from the United States or who
are United States citizens.
Do any of those organizations do that? Do any of them
attempt to not engage in illegal gaming in the United States
which I think virtually every legal scholar that I'm aware of
believes it is illegal to do in the United States under the
current law, to say nothing of any law we might introduce now.
Under current law, I know some individuals have been
prosecuted for that very violation. Do any one of the members
of your organization screen out United States citizens because
they know that it's against the law to engage in that activity
in the United States?
Ms. Schneider. Of the operators that are out there, they
each take into account, from their legal counsel, who'll
they'll take play from. Yes, we do have some that won't take
any play from the U.S. We have some that take play from the
U.S. We have some that take play from the U.S. States that have
passed explicit laws that prohibit internet gambling, so it's a
company-by-company decision in terms of how they handle that.
Mr. Goodlatte. Whether or not they break the law?
Ms. Schneider. Sir, with all due respect, if the law was
that clear, and there is case law that says otherwise in some
of the jurisdictions, I don't think we would be here having
these discussions if it was that crystal clear. It's clearly an
area that's still in need of clarification.
Mr. Goodlatte. Let me ask you this. Would your organization
exclude from membership those organizations who violated the
law if there were a new law that was passed that said very
clearly that you cannot engage in this activity on the internet
with those who are placing these bets from the United States?
Ms. Schneider. That's a process that we would have to go
through in terms of making that kind of clarification. Again,
these are international companies that are operating, you know,
for all the talk about it's an unregulated environment, I have
a feeling that your colleagues in some States in Australia
would take umbrage at that, because it is a highly regulated
jurisdiction there.
So you get into those kind of multi-jurisdictional concerns
that I addressed before. That's the biggest challenge with
this. And I think we have to be forthcoming.
Mr. Goodlatte. The law is very clear in the United States,
one of the two parties to it. It's against the law in the
United States. That is the issue that concerns Ms. Kyle sitting
next to you, your member organizations are without paying any
U.S. taxes, without complying with any kind of regulatory
scheme, as the gentleman from New Jersey Gaming Commission
testified, in violation of the laws of the United States as
they exist right now.
We do need to beef up those laws. We do need to make them
even clearer than they are now. We do need to give law
enforcement new remedies to deal with the problem.
But the fact of the matter is whether there are different
laws in other countries, or around the world, the law in the
United States is that you can't do this. Nonetheless,
organizations that are members of your trade association are
engaged in that activity.
Let me ask Mr. MacCarthy a question.
When you have folks who fraudulently or falsely code their
credit card information, what do you do when you find one
that's brought to your attention?
Mr. MacCarthy. We have a general rule that our merchants
must properly code the transactions.
Mr. Goodlatte. If a merchant doesn't properly code, what do
you do?
Mr. MacCarthy. If it's brought to our attention, we have a
process whereby we investigate, we tell the bank that works
directly with the merchant about the problem, and we instruct
that bank to take steps to correct it, to instruct the merchant
in the process of correctly coding. If that doesn't work, then
there's a process of fines. And if the infraction persists over
an indefinite period of time--the exact number of months is not
prescribed--then we have the capacity to separate that merchant
from the system.
Mr. Goodlatte. Wouldn't you have the same capacity to do
that for merchants who engaged in the activity I just described
with relation to members of Ms. Schneider's organization and
others that are offering these services that are doing so
illegally in the United States?
Mr. MacCarthy. If the circumstance you are describing is an
offshore internet gambling merchant who improperly codes his
transactions, does not use the code for gaming, does not use
the code for electronic commerce, and puts transactions into
our system that potentially put our issuers at risk for
business expenses and for legal expenses and other risks, we
would take steps to try to make sure that that merchant
properly coded and put the transactions into our system in a
fashion that allowed our member issuers to block those
transactions if they so decided.
Mr. Goodlatte. If Mr. Suarez, the Director of the Division
of Gaming Enforcement in New Jersey, presented evidence to you
that his investigators had found that a company in Antigua or
any of a host of other countries around the world were offering
gaming services in New Jersey, and they got under a
hypothetical law, a law that I hope Mr. Leach will be able to
pursue in the law in the near future, but if they were to bring
you a court order that said that they were engaged in that
activity in New Jersey or Virginia or any other of the 50
States that banned this activity or just under Federal law, you
would be able to take steps to cut them off from the use of
Visa cards.
Mr. MacCarthy. Let me go back and reconstruct the example,
if I may. If it's an internet gambling operation and it's
actually operating in New Jersey or in Virginia.
Mr. Goodlatte. Let's say it's in Antigua and the bettor is
in New Jersey. Suarez, as an investigator, happens to be doing
an undercover operation.
Mr. MacCarthy. Let's start with a U.S. example. If that
were the case, because operating an internet gambling operation
in New Jersey or Virginia, or in almost all the States except
perhaps Nevada, since that is illegal, we would take steps
immediately working through the merchant's bank to cut that
internet gambling merchant off from our payment system and we
would inform law enforcement officers right away. We do that
under current law. We work very cooperatively with law
enforcement people in that area.
And the other circumstance that you described, where law
enforcement officials or any other people brought to our
attention the fact that a particular offshore internet gambling
merchant was improperly coding the transactions and expressed
the view that that was contrary to U.S. law, we would work
cooperatively with the law enforcement entity. We would
immediately instruct the merchant bank to take steps to ensure
that that internet gambling merchant properly coded the
transactions.
Mr. Goodlatte. In other words, what we are attempting to
accomplish could be accomplished.
Mr. MacCarthy. If the internet gambling merchant then
continued to insert into the stream of transactions all and
only properly coded transactions, then we would accomplish the
objective of giving our people the capacity to block those kind
of transactions if they so choose. That's under current law.
If the internet gambling operation decided, instead of
cooperation with us and law enforcement entities, decided that
they would simply stop processing transactions in any fashion
and vanished entirely from our system, we would have no way of
knowing where they might resurface, and so it would be very
difficult to follow them.
But insofar as they maintain the contact with our acquiring
merchant, we would be able to work with them to make sure that
they properly coded.
Mr. Goodlatte. I assume these organizations have a desire
to live off of the trade name they develop and therefore to
just disappear and resurface poses some problems for them,
especially if they're going to continue to use a legitimate
means of collecting funds like Visa or another legitimate
business institution.
Thank you, Mr. Chairman. I've abused my amount of time
here.
Mr. Leach. Thank you very much, Mr. Goodlatte. We are all
very appreciative of what you've been attempting to do.
We do have a problem with votes on the floor. This is a
very complicated day and very complicated legislation. In fact,
it's so complicated, we are apparently tied up in process
knots.
But I want to thank this panel very much. Let me say,
procedurally, that all of your full statements will be placed
in the record without objection.
Without objection, Members will have 30 days to submit
written questions and responses if that's possible from the
panels.
I just personally would like to say we would also be very
appreciative of any precision and recommendations of changes to
legislation that may be offered by Members of the subcommittee
that you become aware of.
Certainly, approaches of Mr. Goodlatte, I hope that you
feel free to talk with Bob about and those pieces of
legislation that may be offered in this panel, most
particularly HR 556, but I think there may be others as well.
With that, let me say we are very appreciative of your
coming before us and we thank you for your time and your effort
and we hope it will continue.
Thank you very much. The hearing is adjourned.
[Whereupon, at 5:20 p.m., the hearing was adjourned.]
A P P E N D I X
July 12, 2001
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