United States. Congress. House. Committee on the J.

Unlawful Internet Gambling Funding Prohibition Act and the Combating Illegal Gambling Reform and Modernization Act : hearing before the Subcommittee on Crime of the Committee on the Judiciary, House of Representatives, One Hundred Seventh Congress, first session on H.R. 556 and H.R. 3215, November 2 online

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UNLAWFUL INTERNET GAMBLING FUNDING PROHI-
BITION ACT AND THE COMBATING ILLEGAL
GAMBLING REFORM AND MODERNIZATION ACT






HEAKING

BEFORE THE

SUBCOMMITTEE ON CRIME

OF THE

COMMITTEE ON THE JUDICIAKY
HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION
ON

H.R. 556 and H.R. 3215



NOVEMBER 29, 2001



Serial No. 47



Printed for the use of the Committee on the Judiciary




Available via the World Wide Web: http://www.house.gov/judiciary



UNIVERSITY OF ILLINOIS
LAW LIBRARY

MAR 1 1 2002

FEDERAL DEPOSITORY



U.S. GOVERNMENT PRINTING OFFICE
76-382 PDF WASHINGTON : 2001

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800

Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001



COMMITTEE ON THE JUDICIARY

F. JAMES SENSENBRENNER, JR., WISCONSIN, Chairman



HENRY J. HYDE, Illinois

GEORGE W. GEKAS, Pennsylvania

HOWARD COBLE, North Carolina

LAMAR SMITH, Texas

ELTON GALLEGLY, California

BOB GOODLATTE, Virginia

ED BRYANT, Tennessee

STEVE CHABOT, Ohio

BOB BARR, Georgia

WILLIAM L. JENKINS, Tennessee

CHRIS CANNON, Utah

LINDSEY O. GRAHAM, South Carolina

SPENCER BACKUS, Alabama

JOHN N. HOSTETTLER, Indiana

MARK GREEN, Wisconsin

RIC KELLER, Florida

DARRELL E. ISSA, California

MELISSA A. HART, Pennsylvania

JEFF FLAKE, Arizona

MIKE PENCE, Indiana



JOHN CONYERS, JR., Michigan
BARNEY FRANK, Massachusetts
HOWARD L. BERMAN, California
RICK BOUCHER, Virginia
JERROLD NADLER, New York
ROBERT C. SCOTT, Virginia
MELVIN L. WATT, North Carolina
ZOE LOFGREN, California
SHEILA JACKSON LEE, Texas
MAXINE WATERS, California
MARTIN T. MEEHAN, Massachusetts
WILLIAM D. DELAHUNT, Massachusetts
ROBERT WEXLER, Florida
TAMMY BALDWIN, Wisconsin
ANTHONY D. WEINER, New York
ADAM B. SCHIFF, California



PHILIP G. KIKO, Chief of Staff-General Counsel
PERRY H. APELBAUM, Minority Chief Counsel



SUBCOMMITTEE ON CRIME

LAMAR SMITH, Texas, Chairman

MARK GREEN, Wisconsin ROBERT C. SCOTT, Virginia

HOWARD COBLE, North Carolina SHEILA JACKSON LEE, Texas

BOB GOODLATTE, Virginia MARTIN T. MEEHAN, Massachusetts

STEVE CHABOT, Ohio WILLIAM D. DELAHUNT, Massachusetts

BOB BARR, Georgia ADAM B. SCHIFF, California
RIC KELLER, Florida
[VACANCY]

JAY APPERSON, Chief Counsel
SEAN MCLAUGHLIN, Counsel
ELIZABETH SOKUL, Counsel

KATY CROOKS, Counsel
BOBBY VASSAR, Minority Counsel



(II)



CONTENTS



NOVEMBER 29, 2001
OPENING STATEMENT

Page

The Honorable Lamar Smith, a Representative in Congress From the State
of Texas, and Chairman, Subcommittee on Crime 1

The Honorable Robert C. Scott, a Representative in Congress From the State
of Virginia, and Ranking Member, Subcommittee on Crime 2

WITNESSES

The Honorable James Leach, a Representative in Congress From the State
of Iowa

Oral Testimony 4

Prepared Statement 6

The Honorable Bob Goodlatte, a Representative in Congress From the State
of Virginia

Oral Testimony 8

Prepared Statement 9

Mr. Timothy A. Kelly, PH.D., Former Executive Director, National Gambling
Impact Study Commission, Washington, DC

Oral Testimony 15

Prepared Statement 18

Mr. Frank Catania, Former Director of the New Jersey Division of Gaming
Enforcement

Oral Testimony 33

Prepared Statement 35

APPENDIX

STATEMENTS SUBMITTED FOR THE RECORD

The Honorable Sheila Jackson Lee, A Representative in Congress From the

State of Texas 47

Testimony Submitted from Mr. Michael Chertoff, U.S. Department of Justice . 48

Testimony Submitted from Ms. Lisa S. Dean and J. Bradley Jansen 49



(III)



UNLAWFUL INTERNET GAMBLING FUNDING
PROHIBITION ACT AND THE COMBATING IL-
LEGAL GAMBLING REFORM AND MOD-
ERNIZATION ACT



THURSDAY, NOVEMBER 29, 2001

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CRIME,
COMMITTEE ON THE JUDICIARY,

Washington, DC.

The Subcommittee met, pursuant to call, at 2:04 p.m., in Room
2237, Rayburn House Office Building, Hon. Lamar Smith [Chair-
man of the Subcommittee] presiding.

Mr. SMITH. The Subcommittee on Crime will come to order. I will
recognize Members who are here for their opening statements. We
will proceed immediately to hear from our witnesses today. We
very much appreciate their being here.

The Subcommittee on Crime today addresses a serious and grow-
ing problem for our country: The problem of Internet gambling. The
federally appointed National Gambling Impact Study Commission
has estimated that at least $1.6 billion was wagered over the Inter-
net last year. This is almost a fourfold increase in the last 4 years.

One troubling aspect of Internet gambling is the relative ease of
accessibility for our Nation's children. The anonymous nature of
the Internet makes it almost impossible to prevent underage gam-
blers from using their parents' credit cards or sometimes even their
own to log on to a gambling Web site. Many Internet sites require
nothing more than a name, address and credit card number. Those
sites that do require a person to disclose his or her age make little
or no effort to verify this information.

Another group of people particularly susceptible to Internet gam-
bling are America's addicted gamblers, who now number almost 11
million people. To addicted gamblers the Internet is like a glass of
water to a drowning man. High rates of financial debt, unemploy-
ment, bankruptcy, divorce, homelessness, and suicide are all associ-
ated with gambling problems.

Virtual casinos and their video game structure have been labeled
the crack cocaine of gambling. These facilities are open 24 hours
a day, 7 days a week, all within a person's own home. By making
gambling more convenient, it can do nothing but make the problem
worse.

These Internet sites also offer organized crime groups a very sim-
ple and easy opportunity to launder the proceeds of their criminal
activities. Because of the lack of oversight and regulations and the

(l)



high degree of anonymity, money laundering through the Internet
gambling sites is already a major concern to our Nation's law en-
forcement agencies.

Federal law is unclear as to whether or not all types of Internet
gambling are illegal. The statute that most directly restricts the
use of the Internet for placing bets is the Wire Act, under section
1084 of title 18 of the U.S. Code. However, this statute was written
before the age of the Internet and the use of wireless communica-
tion, so there is uncertainty as to what type of betting is or is not
covered.

We will examine two bills that address the problems of Internet
gambling: H.R. 556, the "Unlawful Internet Gambling Funding
Prohibition Act," introduced by Congressman Jim Leach of Iowa,
and H.R. 3215, the "Combating Illegal Gambling Reform and Mod-
ernization Act," introduced by Congressman Bob Goodlatte of Vir-
ginia.

Mr. SMITH. Each Member is here to testify on behalf of his bill,
and we welcome them both. I know Congressman Leach and Con-
gressman Goodlatte have put a tremendous amount of time and ef-
fort into the issue of Internet gambling. We look forward to hearing
from them, along with two other witnesses who are here today.

And before we begin today's testimony I would like to note that
the Department of Justice has submitted testimony for the record
and will respond in writing to questions Members submit. Their
witness was unable to testify in person because of a schedule con-
flict. That concludes my opening statement.

Mr. SMITH. Now the gentleman from Virginia, the Ranking Mem-
ber of the Subcommittee, will be recognized for his open statement.

Mr. SCOTT. Thank you, Mr. Chairman. I am pleased to join you
in convening this hearing regarding Federal regulation of gambling
over the Internet. Contrary to what we did last Congress, as I re-
member it, we did things a little bit different. We voted on the leg-
islation first and then had a hearing. I am delighted to see that we
are having the hearing first before we consider voting on it.

Mr. Chairman, I believe that gambling should be tightly regu-
lated. It has traditionally been a State regulatory responsibility
primarily and it should continue in my judgment to be so, although
it is appropriate for the government to have a role in that total reg-
ulatory scheme. It undertook such a role in passing the 1961 Wire
Communications Act as a way to assist Federal and State authori-
ties in fighting gambling by organized crime syndicates.

The Department of Justice contends that it can prosecute Inter-
net gambling businesses under that law, even has in fact success-
fully prosecuted an offshore entity recently. Clearly that law was
not designed with prosecuting Internet gambling in mind, so I ap-
preciate the desire of my colleagues, the gentleman from Virginia
and the gentleman from Iowa, to update the ability of the Depart-
ment to address the issues in today's context.

However, I am concerned that the bills before us, similar to the
bills in the last Congress which attempted to regulate Internet
gambling, may not be effective in doing so. It is clear that trying
to regulate gambling businesses or anything else over the Internet
is a daunting task.



Most law enforcement is jurisdiction or situs dependent. The
Internet has no jurisdiction or situs and as a result I suspect that
even if we are successful in closing down business sites in the
United States or in countries that we can get to cooperate, because
of the nature of the Internet this approach will ultimately be inef-
fective because a gambling Web site can evade blockage by merely
changing its Internet address, a process that takes only seconds.
Thus, after a gambling Web site is blocked it can immediately open
up for business under a new name.

Further, we should not overestimate the cooperation we will get
from other countries. Presently over 50 nations allow some form of
gambling online, but that number is likely to grow. And even if we
are successful in getting cooperation from most countries, we would
simply be increasing the profit opportunities for uncooperative
countries, especially those that the United States considers rogue
countries.

To be effective in prosecuting illegal gambling over the Internet,
I think it is important that you have to be able to prosecute indi-
viduals. Neither of the bills before us does so, and neither of the
bills in the last Congress did so. If we took that approach, the same
approach in enforcing drug laws, we would be prosecuting only the
seller but not the buyer. The bills did prohibit individuals from ille-
gally gambling over the Internet. I suspect that we would be even
more effective than we have been with illegal drug use. Because
here the technology of the Internet would be in government's favor
because the activities of illegally gambling by individuals would
leave a trail leading directly back to the gambler.

Aside from these practical issues, there appear to be many policy
concerns with the bills. I have the impression that this hearing, for
example, caught several of the entities affected by surprise. We
have received calls, several calls in the last couple of days from
people representing dog racing, charitable gaming interests, prob-
lem gambling advocates, Internet freedom advocates, lottery oper-
ations, credit card advocates and others indicating concern about
one or both of the bills. I think it will take a while for the full
gamut of concerns to come forth.

So, Mr. Chairman, given the limitations of the hearing format of
only four witnesses per hearing that we must operate under, we
may need to have another hearing so that all the issues may be-
come public so that we can consider them. But I look forward to
the testimony from our colleagues and the other witnesses today as
we deal with this issue.

Mr. SMITH. Thank you, Mr. Scott. And all Members will have
permission and we will keep the record open for all Members to
submit their full opening statements. Also I want to appreciate and
recognize the gentleman from North Carolina, Mr. Coble, for being
here as well.

Let me introduce the witnesses. Then we will proceed. They are
the Honorable Jim Leach, Member of Congress, First District of
Iowa; the Honorable Robert Goodlatte, Member of Congress, Sixth
District of Virginia; Timothy A Kelly, Ph.D., former Executive Di-
rector, National Gambling Impact Study Commission, in Wash-
ington, D.C.; and Mr. Frank Catania, former Director of the New
Jersey Division of Gaming Enforcement.



We welcome you all and appreciate again your attendance, and
I do want to say that I don't want to keep the Members here un-
duly long. So after they testify they will have the option of staying
or leaving, whatever they prefer. With that having been said, we
look forward to your testimony and begin with Mr. Leach.

STATEMENT OF THE HONORABLE JAMES LEACH, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA

Mr. LEACH. Well, thank you, Mr. Chairman. I am honored to be
with you, Mr. Scott, and Mr. Coble. Thank you for holding this
hearing on legislation addressing the endemic problem of Internet
gambling. Your leadership in this issue is deeply appreciated.

The problem posed by Internet gambling is one we ignore at our
peril. Gambling on the Internet is fast becoming one of the most
critical issues confronting thousands of American families. Even
though Internet gambling is a relatively new industry, it is growing
at a rapid rate. Over 1 million Americans gamble on the Internet
daily. Revenue generated from Internet gambling amounted to 1.6
billion worldwide in the year 2000, and it is projected to triple in
the next 3 years.

The social and economic implications of Internet gambling can no
longer be ignored. Approximately 15 million Americans are at risk
for problem gamblers. Problem gamblers are more likely to have
drug addictions, alcohol dependency, serious family dysfunction
and at the extreme, especially when gambling losses accumulate,
a higher rate of suicide.

The financial and economic implications of Internet gambling
may not be intuitive to those unfamiliar with the workings of the
industry, but the consequences cannot be exaggerated. It is simply
not good for the economy at large to have Americans send billions
to overseas Internet casinos which often have shady or unknown
owners.

The very characteristics that make the Internet such a valuable
resource are also the reasons why it is such a huge potential to im-
pinge on the ability of American financial institutions as well as
the American family. The easy access, anonymity and speed of
transactions which makes such positive contributions to the level
of efficiency and cost of financial services also makes routine safe-
guards impractical and leaves the financial services industry open
to abuse.

Internet gambling increases consumer debt, makes bankruptcy
more likely, money laundering an easy endeavor and identity theft
a likely burden. Even though the Financial Services Committee has
three times passed out legislation on this subject, I have been ap-
palled to date at the opposition of credit card companies and a few
banks' efforts to thwart Internet gambling. In my time in Congress
I have seldom seen a situation where those most involved have un-
derstood less well their own self-interest, let alone the national in-
terest of the correlation between gambling and bankruptcy is par-
ticularly disturbing.

A problem gambler is almost twice as likely to file for bankruptcy
than a nongambler. As bankruptcy and default rates driven by con-
sumer debt increase, the effects on the economy will become more
urgent. Bank loan fees and credit card interest rates will inevitably



increase in order to compensate for the added risk of default by
customers. If gambling-related credit card default is prevalent, fi-
nancial institutions can in some instances have the potential to de-
velop or exacerbate broad safety and soundness concerns.

Casino gambling, while it competes for jobs with other sectors of
the economy, such as restaurants in the retail trade, also partly
balances job losses elsewhere with some job creation. Internet gam-
bling, on the other hand, may be the only sector of the economy
where the case for greater efficiency is not altogether compelling.
It reduces jobs in competing parts of the American economy, but
creates few in itself and all to date are abroad. In other words, this
is a jobs as well as a moral, economic and regulatory issue.

Gambling in general and Internet gambling in particular provide
one of the most accessible platforms for money laundering. Money
launderers tend to seek out areas where there is a low risk of de-
tection by law enforcement. Internet gambling specifically is a par-
ticularly attractive method to launder money because of the height-
ened level of anonymity and a virtual lack of governmental regula-
tion.

Reports from the OECD's Financial Action Task Force point to
Internet gambling as a major loophole in anti-money laundering re-
gimes. The U.S. Treasury Financial Crimes Enforcement Network
has a special anti-money laundering program designed for the tra-
ditional domestic gaming industry. No such strategy exists for ille-
gal gambling sites located in unregulated offshore jurisdictions.

Given the hard work of this Committee and also that of the Fi-
nancial Services Committee to quash money laundering efforts of
terrorists and narco- traffickers, it would be irresponsible to leave
such an enormous institutional loophole unplugged.

Another issue that to date that has been widely overlooked is the
potential threat for identity theft and fraud. Without regulation it
is unclear who is doing what with an individual gambler's financial
information. The fact that over 1 million individuals are daily giv-
ing their personal financial information to offshore criminal enter-
prises should be of serious concern to American citizens as well as
the financial services industry that usually shoulders much of the
burden of fraudulent activity.

Additionally, it is now clear that many offshore gambling sites
are associated with the Russian mafia, and the criminal terrorist
network within and outside the United States use identity theft for
financial gain or to hide from authorities.

All of the privacy protections so carefully embedded in recent fi-
nancial institution modernization legislation does not apply to
Internet gambling. This in itself is reason to end Internet gam-
bling.

Finally, I would like to commend Mr. Goodlatte on his hard work
on his legislation. I am in full support of the sections of his bill that
would clarify the breadth and intent of the Wire Act. Mr.
Goodlatte's bill also includes some of what makes up H.R. 556, but
with some significant differences that are a cause of some concern.
Both bills include provisions that would make it illegal for gam-
bling businesses to accept financial instruments such as credit
cards and money transfers for illegal Internet gambling. Both bills
enforce this crime partially through injunctive orders to any person



6

that can prevent or restrain the criminal activity, including finan-
cial institutions. But The approach taken in the bill passed out of
the Financial Services Committee establishes a role for financial
regulators who understand the industry and carefully places and
limits where appropriate the responsibilities of financial institu-
tions.

It is a tradition that where jurisdiction is shared the work with
the Committee with jurisdiction over a particular area is given def-
erence. I support the full goal of the Goodlatte bill, but would re-
quest the Banking Committee product replace the sections of that
bill which deal with financial instruments. I also support the Bank-
ing Committee bill as a stand-alone product. The two together,
however, would represent, I believe, the maximum result, with a
caveat that bills of this nature have the unfortunate characteristic
of becoming magnets for amendments that rather than closing
down might have the effect of opening up gambling initiatives. At
the risk of presumption, I would hope that weakening amendments
can be averted.

In conclusion, let me stress that personally I am a skeptic about
all forms of gambling, but each of us are obligated to the maximum
extent possible to be respectful of legitimate choices made by oth-
ers. Casino gambling as it exists in America is at least regulated
by the State to protect the participants. Generally, casinos also add
entertainment and involve elements of socialization. Gambling
alone, on the other hand, whether using a laptop at home or a com-
puter in the workplace, involves no entertainment or socialization
element and lacks the fundamental protection of law and regula-
tion.

Casino gambling, as it has been sanctioned in all Western democ-
racies, has only been allowed to exist with comprehensive regula-
tion. Internet gambling lacks such. It is a danger to the family and
society at large. It should be ended.

Thank you.

PREPARED STATEMENT OF THE HONORABLE JAMES A. LEACH, A REPRESENTATIVE m
CONGRESS FROM THE STATE OF IOWA

Mr. Chairman, thank you for holding this hearing on legislation addressing the
endemic problem of Internet gambling. Your leadership on this issue is deeply ap-
preciated. The problem posed by Internet gambling is one we ignore at our peril.

Gambling on the Internet is fast becoming one of the most critical issues con-
fronting thousands of American families. Even though Internet gambling is a rel-
atively new industry, it is growing at a rampant rate. Over one million Americans
gamble on the Internet daily. Revenue generated from Internet gambling amounted
to $1.6 billion worldwide in 2000 and is projected to triple in the next three years.

The social and economic implications of Internet gambling can no longer be ig-
nored. Approximately 15 million Americans are at-risk or problem gamblers. Prob-
lem gamblers are more likely to have drug addictions, alcohol dependency, serious
family disfunction, and, at the extreme, especially when gambling losses accumu-
late, a higher rate of suicide.

The financial and economic implications of Internet gambling may not be intuitive
to those unfamiliar with the workings of the industry, but the consequences cannot
be exaggerated.

It simply is not good for the economy at large to have Americans send billions
to overseas Internet casinos which often have shady or unknown owners.

The very characteristics that make the Internet such a valuable resource are also
the reasons why it has such a huge potential to impinge on the stability of American
financial institutions, as well as the American family. The easy access, anonymity,
and speed of transactions which make such positive contributions to the level of effi-
ciency and cost of financial services also make routine safeguards impractical and



leave the financial services industry open to abuse. Internet gambling increases con-
sumer debt, makes bankruptcy more likely, money laundering an easy endeavor,
and identity theft a likely burden.

Even though the Financial Services Committee has three times passed out legisla-
tion on this subject, I have been appalled to date at the opposition of credit card
companies and a few banks to efforts to thwart Internet gambling. In my time in
Congress I have seldom seen a situation where those most involved have understood
less well their own self-interest, let alone the national interest.

The correlation between gambling and bankruptcy is particularly disturbing. A
problem gambler is almost twice as likely to file for bankruptcy than a non-gambler.
As bankruptcy and default rates, driven by consumer debt, increase, the effects on
the economy will become more urgent. Bank loan fees and credit card interest rates
will inevitably increase in order to compensate for the added risk of default by cus-
tomers. And, if gambling related credit default becomes prevalent, financial institu-
tions can in some instances potentially develop or exacerbate broad safety and
soundness concerns.

Casino gambling, while it competes for jobs with other sectors of the economy,
such as restaurants and the retail trade, also partly balances job losses elsewhere
with some job creation. Internet gambling, on the other hand, may be the only sec-
tor of the economy where the case of greater efficiency is not altogether compelling.
It reduces jobs in competing parts of the American economy, but creates few in itself
and all, to date, are abroad. In other words, this is a "jobs" as well as a moral and
regulatory issue.


1 3 4 5 6 7

Online LibraryUnited States. Congress. House. Committee on the JUnlawful Internet Gambling Funding Prohibition Act and the Combating Illegal Gambling Reform and Modernization Act : hearing before the Subcommittee on Crime of the Committee on the Judiciary, House of Representatives, One Hundred Seventh Congress, first session on H.R. 556 and H.R. 3215, November 2 → online text (page 1 of 7)