[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
CAN INTERNET GAMBLING BE
EFFECTIVELY REGULATED TO PROTECT
CONSUMERS AND THE PAYMENTS SYSTEM?
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JUNE 8, 2007
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-37
U.S. GOVERNMENT PRINTING OFFICE
37-553 PDF WASHINGTON DC: 2007
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HOUSE COMMITTEE ON FINANCIAL SERVICES
BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York DEBORAH PRYCE, Ohio
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
JULIA CARSON, Indiana RON PAUL, Texas
BRAD SHERMAN, California PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts WALTER B. JONES, Jr., North
RUBEN HINOJOSA, Texas Carolina
WM. LACY CLAY, Missouri JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York CHRISTOPHER SHAYS, Connecticut
JOE BACA, California GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts SHELLEY MOORE CAPITO, West
BRAD MILLER, North Carolina Virginia
DAVID SCOTT, Georgia TOM FEENEY, Florida
AL GREEN, Texas JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin, J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida KENNY MARCHANT, Texas
JIM MARSHALL, Georgia THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma
Jeanne M. Roslanowick, Staff Director and Chief Counsel
C O N T E N T S
----------
Page
Hearing held on:
June 8, 2007................................................. 1
Appendix:
June 8, 2007................................................. 41
WITNESSES
Friday, June 8, 2007
Balko, Radley, Senior Editor, Reason Magazine.................... 12
Colopy, Michael, Senior Vice President, Communications,
Aristotle, Inc................................................. 22
Hogan, Reverend Gregory J., Sr................................... 20
Kitchen, Gerald, Chief Executive, SecureTrading Group Limited.... 14
Prideaux, Jon, Chief Executive, Asterion Payments................ 16
Schmidt, Jeff, Chief Executive Officer, Authis................... 18
APPENDIX
Prepared statements:
Carson, Hon. Julia........................................... 42
Cleaver, Hon. Emanuel........................................ 44
Balko, Radley................................................ 45
Colopy, Michael.............................................. 49
Hogan, Reverend Gregory J., Sr............................... 53
Kitchen, Gerald.............................................. 59
Prideaux, Jon................................................ 71
Schmidt, Jeff................................................ 81
Additional Material Submitted for the Record
Statement of the Antigua Online Gaming Association............... 84
Paper submitted by the Gaming Law Review......................... 89
Statement of Mark Holland, Partner, Baker Tilly.................. 105
Statement of Craig Pouncey, Partner, Herbert Smith LLP (Brussels) 108
Statement of the Remote Gambling Association..................... 113
Statement of Keith Whyte, Executive Director, National Council on
Problem Gambling............................................... 119
Statement of Mary Williams, Chief Secretary, Isle of Man
Government..................................................... 122
Statement of Andre Wilsenach, Chief Executive Officer, Alderney
Gambling Control Commission, Channel Islands................... 132
Letter to Chairman Barney Frank from Frank Catania, Catania &
Associates, LLC................................................ 147
Letter to Chairman Barney Frank and Ranking Member Spencer Bachus
from Chad Hills, Analyst for Gambling Research & Policy, Focus
on the Family.................................................. 149
Letter to Chairman Barney Frank from Andrew Poole, Head of Online
Services, GamCare.............................................. 151
Letter from the General Board of Church and Society of the United
Methodist Church............................................... 165
Letter from the National Coalition Against Gambling Expansion.... 167
Letter from the National Association of Attorneys General........ 169
Joint letter from the National Basketball Association, the
National Collegiate Athletic Association, the National Hockey
League, Major League Baseball, and the National Football League 174
CAN INTERNET GAMBLING BE
EFFECTIVELY REGULATED TO PROTECT
CONSUMERS AND THE PAYMENTS SYSTEM?
----------
Friday, June 8, 2007
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10 a.m., in room
2128, Rayburn House Office Building, Hon. Barney Frank
[chairman of the committee] presiding.
Present: Representatives Frank, Carson, Cleaver, Wexler;
Bachus, Paul, and LaTourette.
The Chairman. Good morning. The hearing will come to order.
First, let me apologize to the witnesses for the fact that only
a couple of us are here. When I originally scheduled this
hearing, we were under the impression that there would be votes
this morning. On the other hand, your testimony will not be
interrupted by our having to go off for an hour while you all
sit here, so there are pluses and minuses to that. Staff
members of various members are here, and they are often a very
good way to get information to us.
This hearing is on the subject of the regulation of
Internet gambling. Gambling in general is not the jurisdiction
of this committee, and in fact, I had a conversation on Monday,
I believe of this week, or Tuesday, rather, with John Conyers,
the chairman of the Judiciary Committee, which has primary
jurisdiction over gambling.
In the previous Congress, we did enact legislation to
restrict the payment of Internet debts where credit cards were
involved, and that's wholly within our jurisdiction. I voted
against that bill, and I think it's important to be clear about
what I think is really at issue here.
The bill was justified in part by people who said that we
must prevent money laundering for the purposes of either
terrorism or drugs, and that we must prevent young people from
doing things that they shouldn't do. But my own conviction,
having talked to a lot of members, and listening to the debate,
is that the primary motivation came from people who think
gambling is wrong.
Now, I have no quarrel with people who think that gambling
is wrong. My quarrel is with people who, thinking that gambling
is wrong, want to prevent other people from doing it.
This whole debate has driven me back to a book that I only
vaguely remembered, and I have now become impassioned with:
John Stuart Mill's, ``On Liberty.'' I recommend it to people
for the great philosophic text in our tradition.
The book makes the essential point that it is not the role
of the government to send people with guns, under the threat of
imprisonment, to make you better. We can give people
information. We can, through various institutions in the
society, give people instruction. But in the end, adults ought
to be able to decide for themselves how they will spend the
money that they earn themselves, as long as it does not have an
effect on others.
Now, it is possible to argue that everything we do affects
everybody else. People have said, ``Well, you say it doesn't
affect others, but if you gamble too much, then you're
affecting others.'' Well, if you do anything too much, it
affects others. The problem with that is it's a classic case of
an argument that proves too much.
If you take that argument that, in fact, people have a
right to your services, that people have a right for you to be
healthy, it goes to extremes. People start telling each other
what to eat, when to exercise; all of those things affect you.
Clearly, there is in the minds of most of us a distinction
between those things we do that primarily affect ourselves and
those who choose voluntarily to associate with us, and those
things that we do that inevitably impact on others. That is a
line that I think government would be well advised to respect,
and this bill undoes that.
It is one of the rare cases where some of my conservative
friends and some of my liberal friends come together. I have
conservative friends who tell me gambling is wrong, and
apparently I hear from some that there are biblical injunctions
against it, although apparently there is an exception for
bingo, which I have not yet been able to--I don't have a good
enough textual expertise to find it, but I gather it is there.
On the part of my liberal friends, to be honest, I think many
of them think it's tacky. I think that they just don't think
it's a nice thing to do, and therefore feel free to ban other
people from doing it.
Some argue, well, we must protect the poor from spending
their money unwisely. I reject that. If you want to help poor
people, there are other ways to do it.
I suppose if you don't have enough money, there are a lot
of things that I might advise you not to do: drink beer; go to
baseball games; buy certain things; or spend too much on
articles of clothing. Yes, there are a lot of pieces of advice
we should give people. But I would not legally ban lower-income
people from spending too much on their athletic shoes and their
jeans, and I don't think we should do that here.
Now, I know the argument is, well, but there are abuses
here. I believe we can deal with the abuses. Let me deal with
one, and that is young people. There is a great danger in this
society that we will substantially circumscribe the freedom
that adults ought to have because we are afraid that some young
people might abuse it.
It is incumbent upon us to try to differentiate in our laws
between what adults can do and young people can do, and as far
as Internet is concerned, I will say, from a lot of my
conservative colleagues, I hear the mantra, ``Never regulate
the Internet.''
And I guess what they really mean is, ``Never regulate the
Internet unless we find something offensive, and then we'll
regulate it,'' because this is the most substantive
interference with the freedom of the Internet that has ever
been enacted into law.
People are entitled to be for this. They are not entitled
to be for this and then say, ``Oh, but we respect the integrity
of the Internet to be free.''
And let me just close by saying this: We do allow a number
of things to go on through the Internet that should be age-
restricted. You can buy wine over the Internet. You can buy
cigarettes over the Internet. You can look at--in fact, the
courts have said to us, to the Congress, ``You have gone too
far in terms of First Amendment rights in banning certain kinds
of sexual-oriented material.'' Instead, they have said,
``Differentiate according to age.''
So we have been told by the courts, by the Supreme Court of
the United States, that it is not appropriate simply to ban
something entirely because young people might abuse it.
Instead, we are under the obligation constitutionally to do the
best we can to differentiate.
I think we know that there are ways that you can not
totally prevent, but substantially diminish, age-inappropriate
uses through the Internet. That ought to be done here.
But I again want to repeat, and we're also told, ``Well,
gambling is this possible front for terrorism.'' Well,
everything is a possible--everything. But there is zero
evidence that we have, in fact, had people playing poker so
they can bomb buildings. I await that evidence. I hope it isn't
there. If it is, I'll look at it. But I don't believe it is.
I think, just to close, what we have is people who don't
like gambling and think that they have a right, through the
government, to prevent other people from doing it. I regard
that as a very grave crossing of the line that we in government
ought to respect.
I now recognize the gentleman from Alabama.
Mr. Bachus. I thank the chairman, and I appreciate the
opportunity for us to discuss the legislation that we passed
last year.
One of the last acts that this Congress passed last year
was the Unlawful Internet Gambling Enforcement Act. It passed
317 to 93, and enforcement of the Act capped a multi-year
effort to protect American families from the well-documented
ill effects of illegal online gambling.
The new law attacks the problem of Internet gambling,
illegal Internet gambling, through the payment systems, by
prohibiting financial intermediaries from processing
transactions involving unlawful gambling under applicable State
and Federal laws, including the Federal Wire Act, and the
Professional and Amateur Sports Protection Act.
It does not prohibit anything which is not already illegal.
It simply enforces the law that has existed in this country for
years.
As the record developed by this committee and the Judiciary
Committee over the past several years has shown, gambling too
often, illegal Internet gambling, results in addiction,
bankruptcy, the destruction of families, and criminal activity.
Internet gambling magnifies the destructiveness of gambling by
bringing the casino into the home.
According to an extensive study conducted by the University
of Connecticut Health Center, 74 percent of those who have used
the Internet to gamble have serious, chronic problems with
addiction, and many of those have resorted to criminal
activities to pay for their habit.
One of the witnesses who is with us this morning, Pastor
Greg Hogan, will share with this committee the story of how
Internet gambling addiction placed his high-achiever son on a
path that ultimately led to prison.
The NBA, the NCAA, major league baseball, all of those
testified before our committee as to the corrupting influence
of illegal Internet gambling on athletes. Some claim that
illegal Internet gambling is a victimless crime. The chairman
has done that this morning.
In fact, the real, the very real victims of illegal
Internet gambling, the ones I'm concerned about, are the ones
he spoke of, the underage gamblers who, by the tens of
thousands, are becoming compulsive, addictive gamblers.
They can't go in a casino. They can't go in debt legally.
So they do it on the Internet, which is prohibited and illegal,
but they do it anyway. They do it in their bedrooms. They do it
in their dorm rooms. It is a mushrooming epidemic, leaving in
its wake suicides, crime, and financial and family tragedies.
The Judiciary Committee, and our committee, had several
instances of college students who committed suicide as a result
of Internet gambling and the debts they drove up. When it comes
to illegal Internet gambling--and I stress, we're talking about
illegal Internet gambling. So those who are testifying in favor
of this bill are actually talking about taking away
prohibitions on what is already illegal.
If the activity was legal, then it would have been in our
court to try to make it illegal, but this is not a debate over
whether it's illegal or not. Every State in this union has a
prohibition against this type of gambling.
When it comes to this type of gambling, illegal Internet
gambling, there are three reasons in particular why it is
dangerous.
Number one, the Harvard Medical School, the University of
South Florida, and the American Psychiatric Association all
conducted studies showing that the earlier one begins gambling,
the more likely it is he or she will become an addicted,
problem gambler. In fact, the Harvard study--and you are a
graduate of Harvard, Mr. Chairman--showed that teenagers are 3
or 4 times more likely to become addicted than the older
population.
Second, pre-teens, teens, and college students have
unlimited access to the Internet, 24 hours a day, 7 days a
week. Because of the repeated exposure they have to illegal
Internet sites, gambling sites, they fall victim by the
thousands. These are illegal sites operated, most of them
offshore, or all of them offshore, I would assume.
So the people who are operating these sites are violating
the laws of our country. I don't know any other way to say it,
other than that they are criminals. If you violate the criminal
laws of our country, does that make you a criminal? I think it
does. In fact, a University of Connecticut study showed that as
many as three in four pre-teens and teens who are exposed to
Internet gambling become addicted.
Third, compulsive, problem gambling, particularly among
young people, has been shown to result in the following:
Increased withdrawal from normal activities; and turning to
criminal activities to recoup financial losses.
The NCAA testified before the Judiciary Committee about the
starting quarterback at Florida State University, who on an
illegal Internet site ran up over $10,000 worth of debt, turned
to burglary to try to solve this problem, was betting on games
involving his own institution, and ended up in prison. He is
only 1 of about 14 NCAA athletes who have been convicted in the
past few years of illegal Internet gambling. A lot of people
don't care about this. They make money on these games, they
make money on these athletes, and so they aren't really
concerned with whether the athletes end up in jail.
But this same study, the Connecticut study, showed that
many of these teens turn to criminal activities to recoup their
financial losses, they take drugs to deal with the depression,
and as the Harvard study showed, the South Florida study, the
American Psychiatric study, and 48 other studies by
universities and health groups showed, their irresponsible
behavior leads also to family and other relational problems.
A study by McGill University, and this is in the past 2
years--we didn't have the benefit of this study--found that
nearly one-third of teen compulsive gamblers have attempted
suicide.
The University of Pennsylvania has recently found that the
number of young people addicted to gambling, largely due to
what they found was an increased exposure to illegal Internet
gambling, is growing by an alarming 20 percent between 2004 and
late 2005.
They call this an epidemic which the country will deal with
socially and economically for decades to come.
Thus, Congress's failure to act for many years, because of
the resistance of many of the people pushing for today's bill,
we are seeing the devastating consequences of efforts in this
Congress for 2 or 3 years to stall our efforts.
The law we passed last year has already had a significant
impact on the market for illegal gambling services, prompting
the major players in the industry, many of which are publicly
traded companies in the United Kingdom, to cease their U.S.
operations immediately.
As reports in the Washington Post and others showed, they
spent over $100 million resisting our effort to pass this bill.
And yet, just as the new law is in the process of being
implemented, through regulations that the Treasury and the
Federal Reserve are expected to issue shortly, a concerted
effort is already underway to undo it.
Chairman Frank has introduced legislation that we regulate
rather than prevent gambling over the Internet. I don't
question his motive, but the bill would establish the
presumption in favor of legalized online casinos and sports
betting--something that the NBA, major league baseball, the
National Football League, and the NCAA worked for years to
stop--and reward and legalize offshore Internet gambling sites
that accept debts from Americans in violation of the U.S. law.
The licensing regime contemplated by the legislation is
premised upon the ability of Internet gambling sites to detect
and block attempts to gamble online by minors, compulsive
gamblers, and individuals located in jurisdictions that legally
prohibit gambling.
Let me say in conclusion, Mr. Chairman, that experts in the
field of online protection and identity verification have
openly questioned the effectiveness of technology currently
available that attempts to verify age and identity in online
settings, and advise the Judiciary Committee that only the
prohibition we passed would work.
In summary, Mr. Chairman, there is no compelling reason to
change the course that Congress wisely charted last year when
it passed strong legislation to combat the scourge of Internet
gambling.
Rather than spending our time trying to undermine the new
law, we should be devoting our energies to rigorous
implementation. America's youth, their families, and
communities should expect no less.
Thank you, Mr. Chairman.
And let me say this--
The Chairman. We're over 10 minutes.
The gentleman from Florida.
Mr. Wexler. Thank you, Mr. Chairman.
I will be brief. I just want to make a couple of quick
points.
First, I very much want to associate myself with Chairman
Frank's remarks and simply want to point out what I think are
certain misunderstandings in terms of the current law.
If you were to listen only to those last year who advocated
in support of the Unlawful Internet Enforcement Gambling Act
and listen to the ranking member this morning, you might have
the impression that there is no legal gambling on the Internet
today in the United States. That's not true.
The law, the way it was crafted last year, in the current
state of the law, if you want to bet on horse racing on the
Internet today, you can do it with perfect legality. So if your
thing is betting on horses, you can bet on the Internet, and we
sanction it. If you want to participate in lotteries, in many
of the States across the Nation, you can bet on lotteries all
you want, on the Internet. Off-track betting is now on the
Internet.
So the uneven state of the law simply says that if you're a
horse racing fan, you can bet on the Internet, but if you're a
poker player, you can't bet on the Internet. If you play Mah
Jongg, and I represent a district that is probably the Mah
Jongg capital of the world, if you play Mah Jongg, you can't
bet on the Internet.
So this statement of gambling versus non-gambling is not, I
don't think, reflective of the reality of the law the way we
are today.
And if I can make one point as to personal responsibility,
which I think gets to the heart of some of the objections, I
have three kids. You could turn on HBO at 1:30 in the morning,
and probably very simply watch movies I wouldn't want my 14-
year-old child to watch. Does that mean we should shut down
HBO? Of course not. What it means is, I or my wife ought to be
wondering why my 14-year-old is up at 1:30 in the morning, and
if he is, checking to see what he's watching on television to
see if we permit it.
But it's not HBO's fault if he's watching something at 1:30
in the morning, and I'm not bothering to check on my 14-year-
old. Likewise, to bet on gambling on almost all sites, and I
understand there are some exceptions, you need a credit card.
Well, how does a kid get a credit card? He or she gets a credit
card usually because mom or dad or the caregiver or the
guardian permits them to have a credit card. And if they're
really industrious and they're going about getting these phone
cards from Eastern Europe or whatever it is, again, parental
responsibility.
So I find it somewhat ironic that those that often are so
quick to argue parental responsibility, individual
responsibility, when it comes to online gambling, all of a
sudden parents have no responsibility at all, apparently, to
monitor the conduct of their teenage children.
The real issue is, adults that want to gamble on games of
skill in particular, like poker and Mah Jongg, why not? Why
should we make it into an illegal behavior?
And with respect to adults gambling, they do it today
legally with the Congress's blessing, with State legislatures'
blessing, all across America, but they happen to be the
preferred choice of gambling apparently, horse racing and
lotteries, but if you want to bet on poker and Mah Jongg, and
other games, dog racing, apparently that's somehow immoral.
Thank you, Mr. Chairman.
The Chairman. The gentleman from Texas.
Dr. Paul. Thank you, Mr. Chairman. I appreciate the
opportunity to talk about this bill, since I am an original co-
sponsor. I'm not sure that I can improve on John Stuart Mill,
or your statement, because I endorse essentially what you said,
but I do want to make a few comments about this.
It has already been mentioned, but I strongly believe there
are two major reasons why this is a good bill. One, freedom of
choice is important in a free society. Responsibility for
improving one's behavior should be on the individual, the
family, and the church and local community, not on the Federal
Government. It hasn't worked before, and it probably won't ever
work in the future.
Also, I strongly believe in supporting this type of
legislation because I want to do my utmost to protect the
Internet, in that this is a source of the spread of
information. Even for good reasons, regulating the Internet can
backfire on us and be used for other reasons.
I was particularly interested in the chairman's comments
about the economic right to spend one's own money, and I
strongly endorse that principle, but I would like to emphasize
that I'd like to see the day when the individual has an
economic right to spend all their money and not just the money
left over after the government took their share. So I would
make a distinction there that I would like to see that we, as
individuals, have the right to spend all our money.
But I would like to identify with the ranking member's
statement, as well, because he has made some very good points,
and I agree with his concerns about the danger of gambling.
Obviously, the issue of gambling doesn't interest me that
much, because I don't like it, and I taught my kids not to do
it, but it's back to the problem of who is really responsible.
One thing, if we look at our history, prohibitions never
worked. It was a total failure for alcohol, and we're currently
failing with drugs, so if you come in and have another
prohibition, it won't work. It will just drive it into the
underground, and even in the electronic age, there are ways of
doing that.
One thing that is interesting in this new age of
prohibition is that in the original prohibition era, when we
thought we had to prohibit the use of alcohol to improve one's
behavior, we did it, and because of great concern for the
Constitution, we amended the Constitution. Then we repealed it
when we found out it didn't work.
Today, there's no concern. We just write laws of
prohibition, whether it's gambling or drugs or whatever. And I
think the way we do these things is every bit as important as
the issue itself.
But I'm a strong supporter of this legislation, and over
the years, I had opposed the efforts of H.R. 4411, but I
strongly support H.R. 2046 to restore the rights of Americans
to decide for themselves whether or not to gamble online.
I yield back.
The Chairman. The gentleman from Ohio.
Mr. LaTourette. Thank you, Mr. Chairman. I'll attempt to be
brief.
I want to welcome all our witnesses here today, in
particular Reverend Hogan, whose church I understand is in
Congresswoman Sutton's district, but you live in Hudson, Ohio,
so I guess I get to claim you, and welcome you.
And I think that, as I listen to the other opening remarks,
I have to tell you, maybe after this hearing, the gentleman
from Florida can tell me how you bet on Mah Jongg. I'm not
familiar with that.
And the other observation about parental responsibility--
The Chairman. If the gentleman would yield, I think the
interesting question is, from my experience, how do you teach
Mah Jongg players to use the Internet?
[Laughter]
Mr. LaTourette. It has been probably 25 years since I
played Mah Jongg, so I don't know.
But relative to the credit card issue, I understand the
whole thing about HBO and bad movies, but I have two children,
one 23 and one 19. I have more than two children, but those are
the ones who are of age, and both of them have three credit
cards, and neither one of them have a job. I was horrified to
find that out, and it certainly wasn't done with my permission
or consent,
A former member of this committee, who is now elevated, I
guess we call it, elevated to the United States Senate, Senator
Sanders, I was always willing to join with him on this notion
of these unsolicited credit card solicitations that go to
people without jobs who are not of age. And so I think it's
pretty easy for a person without a parent's knowledge, who is
in college, to have a credit card and engage in this activity.
I respect the chairman's principled opposition to the bill
that we passed last year. I guess I'm saddened that before the
regulations are written, we are attempting to adjust that.
But I do hope that today's hearing does address some of the
serious concerns, that even if the chairman's idea is a good
idea, that the technology exists to actually do what the
chairman envisions.
And the only case that I'm aware of, that I've had the
chance to review, was ACLU v. Gonzales, and I think in that
case, the judge said that the stuff doesn't exist, and if it
does exist, it doesn't work.
So I respect the chairman's observations about children and
keeping them from gambling and age restrictions, but if we
don't have the software or hardware or whatever ware we need to
accomplish what he's attempting to accomplish, I have to remain
opposed to this legislation.
And I yield back.
The Chairman. I thank the gentleman.
I'm going to recognize myself for additional time. There
are a couple of points that I want to make.
First of all, with regard to credit cards, frankly, I'm
somewhat surprised to hear my Republican colleagues complain
about the excessively free use of credit cards. I didn't vote
for the bill, the bankruptcy bill that gave the credit card
companies all those advantages. Some of the people on the
Democratic side of the aisle, our colleague from North
Carolina, Mr. Watt, had tried to put some restrictions on
credit card company solicitations to young people.
So I do think it is the case that many of my Republican
colleagues, in particular, have in every other aspect supported
the ability of the credit card companies to solicit, to have
special protections in bankruptcy, and now to complain that
some of the people who get the credit cards that you have made
so freely available and so iron-clad in terms of their
collectability, that some people are misusing them, seems to me
impinge on the freedom of others.
And I am struck that what I heard from the ranking member
and others is that some people will abuse this. The argument
that you ban something entirely because some people will abuse
it seems to me the wrong principle for society.
I'm also struck by the inconsistency--my conservative
friends, in particular, usually say, ``Listen, if you've
committed a crime, you're responsible.'' This notion that
society made me do it is generally mocked by Republicans when
we talk about criminal behavior.
And now what we're told is, ``Oh, you must stop everybody
in America from doing this because a minority of them will be
led into criminal behavior and it won't be their fault.'' Well,
that is an abdication of the principle of personal
responsibility.
And the other thing I would say is that in terms of age
restriction, I assume we will soon have legislation to ban the
sale of cigarettes and alcoholic beverages over the Internet.
To my understanding, you can buy cigarettes and alcoholic
beverages over the Internet. Those are age-restricted, and I
think they're very important.
Actually, I am struck that we--and I may have misunderstood
here. I thought we were talking about young people, though as
the gentleman from Florida said, if your pre-teen has a credit
card, for God's sakes, take it away. Don't come and tell adults
that they can't do something because you can't keep your 9-
year-old's hands off of your credit card. But we're talking
apparently about adults, about people in their 20's, and I
think we should make whatever we can available.
I would also say this: If you are in your 20's, and you
have this predilection to do something wrong, it's very hard
for a free society to stop you. At some point, there are other
ways you can do it.
But I am struck again that what we are told here is not
that this is inherently something wrong. You know, most things
that I want to ban are just wrong. You should never take
someone else's money. You should never assault someone. You
should never start a fire. You should never cheat someone. But
the argument that you make something illegal because a minority
are going to abuse it is a problem,.
And the last thing I would say is this, in terms of the
consistency issue. Many of my Republican friends have again
talked about the importance of free trade and living up to our
international free trade obligations, and we have been told
that we can't do certain things because we did adhere to the
World Trade Organization--I voted no, but we did--and we have
to live up to those obligations.
We have been found in violation of our World Trade
Organization obligations under this bill, and people are
basically saying, ``Well, who cares? The people who complain
about us are little, so we can ignore them.'' But, you know,
people are entitled to one side or other of the argument, but
not to both.
Mr. LaTourette. Does the gentleman have any more time left?
The Chairman. Yes. You have 2 minutes left on your side.
Mr. LaTourette. Thank you. I'll try and just use about 30
seconds of it.
I hope the chairman was using the royal ``you'' because
when we had the discussions on credit cards and everything
else, I did in fact join with Sanders and Watt and so forth and
so on.
I happen to not think that this unbridled solicitation of
minors and people who aren't financially responsible should
have credit cards, one, I thought it was a bad idea then, and I
continue to think it's a bad idea now.
And so--
The Chairman. I acknowledge that, but I was talking about,
I thought I was explicit, the great majority of the Republican
party. The bankruptcy bill was passed by--
Mr. Bachus. Will the gentleman yield?
The Chairman. I yield to the gentleman.
Mr. Bachus. How much time do we have left on this?
The Chairman. On your side, none, but go ahead.
Mr. Bachus. Okay.
[Laughter]
Mr. Bachus. That concludes my remarks. No.
Let me just again say that the chairman has used the words
``make illegal,'' ``ban,'' ``prohibit,'' and ``stop.'' What we
did late last year did none of those things.
Illegal Internet gambling was illegal, prohibited in all 50
States except in one or two rare cases, and in those cases, we
didn't--the law didn't operate.
So yes, we have the right to decide what we're going to
make legal and illegal, and we did that in this country, and
that's why the--
The Chairman. I would ask the gentleman, what's the purpose
of the law? If it was already illegal, what did you need this
law for?
Mr. Bachus. I mean, we didn't decide that--
The Chairman. But why did you want this law, then, if it
was already illegal?
Mr. Bachus. The law is an enforcement mechanism because
even though there was a prohibition, it was a criminal activity
to engage in it, people did it in offshore sites, and we
weren't able to shut them down.
And I will agree with you, the WTO has come in and said
it's a violation of the WTO and our international trade
agreement for us to try to stop illegal Internet gambling in
our own homes, which, boy, is--
The Chairman. No, let me--
Mr. Bachus.--the testimony of the WTO and--
The Chairman. No, what the WTO said is what the gentleman
from Florida pointed out, that it's hypocritical and
inconsistent to allow your own gambling if it takes place at a
racetrack in America or a dog track in America and ban it when
it takes place in a foreign country.
What the WTO found us guilty of was blatant hypocrisy and
violating the fundamental principle of the WTO, namely, that
you cannot give yourself economic rights that you then deny to
other countries.
Mr. Bachus. I think we let other countries come in if they
want to come in and gamble at our racetracks--
The Chairman. You might, but again, you misstated the WTO's
principle. The WTO, if we had banned all gambling in America,
then I don't think you would have had this WTO case.
But what they hit on was that we allow gambling in America,
you can gamble on a racetrack in America, or a dog track in
America, or State lotteries, or a whole lot of other things,
but you can't--you know, And I guess, look, I suppose the next
thing we'll see is that young people are buying too many
scratch tickets. I don't know how you stop them doing that.
Mr. Bachus. Well, of course, your scheme--you know, this
legislation today, still the WTO has indicated they're still
going to challenge what you do because it restricts access to
our U.S. market.
The Chairman. Yes. And I would like to, if we had
jurisdiction, I would restrict that, as well, but our committee
doesn't have jurisdiction over that.
Mr. Bachus. In fact, they have indicated that it's going to
be easier to challenge, the WTO challenge, if this legislation
passes.
The Chairman. Oh, I don't believe that's the case. We've
already been found in violation. How can it be easier?
Mr. Bachus. Well, you have arbitrary opt outs--
The Chairman. But it's already--
Mr. Bachus.--and carve outs, which they prohibit.
The Chairman. You mean for the sports teams, the leagues?
Yes, we did give those arbiters of absolute moral superiority,
the professional athletic leagues, in a concession to reality,
the right to opt out.
Well, let's get to the witnesses. The gentleman from Texas
is going to introduce the first witness.
Dr. Paul. Thank you, Mr. Chairman.
Chairman Frank, Ranking Member Bachus, I am pleased to
welcome Radley Balko, senior editor of Reason Magazine, one of
my favorite publications, to the hearing.
Mr. Balko is one of the most perceptive critics of
government policies that prevent individuals from engaging in
what the government considers immoral or unhealthy behavior.
Mr. Balko's defense of civil liberties has appeared in a wide
range of publications, including the Wall Street Journal, the
Washington Post, and foxnews.com.
His writings on the militarization of law enforcement were
cited by Justice Stephen Breyer's dissent in the Hudson v.
Michigan case.
I'm sure my colleagues will benefit from Mr. Balko's
thought on how banning Internet gambling is inconsistent with
constitutional government and a free society.
Welcome.
The Chairman. Mr. Balko, go ahead. I know you went to some
considerable trouble to get here, and we appreciate that.
STATEMENT OF RADLEY BALKO, SENIOR EDITOR, REASON MAGAZINE
Mr. Balko. Thank you, Mr. Chairman.
Mr. Chairman, and distinguished members of the committee,
my name is Radley Balko, and I am a senior editor with Reason
Magazine. I am also a former policy analyst at the Cato
Institute.
I have spent a good deal of my time writing and researching
civil liberties issues, including the problems associated with
the prohibition of victimless crimes. I'd also like to commend
Chairman Frank for his work defending individual freedom, and I
thank the committee for inviting me today.
The Unlawful Internet Gaming Act was passed under rather
dubious circumstances. It passed the U.S. Senate on the last
day of Congress, late at night, with no Floor debate, after
being attached to an unrelated port security bill. My problem
with how the bill passed, however, is beside the point. Let's
get to the crux of this issue, Mr. Chairman.
What Americans do in their own homes, with their own money,
on their own time, is none of the Federal Government's
business. Take online poker, by far the most popular form of
online gambling. Poker has enjoyed a surge in popularity over
the last several years. The game is about as mainstream and
uniquely American as baseball.
Poker evolved from similar card games in the early 1800's,
then flourished in popularity on Mississippi's river boats,
winning over such iconic American aficionados as Mark Twain.
Today, most daily newspapers have a poker column, including the
New York Times. The game saturates cable television. And until
recently, even members of the Supreme Court had a monthly poker
game.
Online poker is merely a new evolution of the game, similar
to the way Civil War poker games introduced the straight, and
gave us variations like draw and stud poker. The Internet
merely removes the geographic barrier preventing those who love
the game from finding opponents of similar skill who are
willing to wager similar amounts of money.
No one is hurt when two or more consenting adults sit down
for a game of poker, be it online or in person. Why any of this
should be of concern to the Federal Government is rather
perplexing.
I respect the fact that many Americans and many Members of
Congress may have moral objections to gambling, online or
otherwise. To them, I'd say simply, well, don't gamble, then.
But in a Nation where Las Vegas is one of our fastest-
growing cities and most popular tourist destinations, where
Indian casinos are commonplace, where horse racing is a
national pastime, where nearly every State in the union derives
public funds from State lotteries, singling out Internet
gambling for prohibition seems arbitrary, and, frankly,
hypocritical.
Yes, it's possible that a parent could bet away their
family's savings or their child's education fund in an online
poker game. They could also fritter that money away on eBay or
on booze or fancy cars or exotic travel. But these are personal
decisions, and if a free society means anything, it means we
should have the freedom to make bad choices in addition to good
ones.
The ban on Internet gambling punishes the millions of
Americans who are wagering online responsibly due to anecdotal
evidence of a few who may do so irresponsibly. It's an affront
to personal responsibility and symptomatic of a government that
treats its citizens like children. A government based on the
principle of liberty doesn't police the personal lives of its
citizens for bad habits at any level, much less the Federal
level.
Supporters of a ban on Internet gambling say that the
industry is unregulated, that underage people are more likely
to gamble online, and that it supports money laundering and
similar criminal enterprises. These are all problems wrought
not by the decision of a consenting adult to gamble, but by the
Government's decision to prohibit it.
Were Congress to give its blessing to legalized online
gambling, I suggest you'd soon see brand names like Harrah's,
MGM, and Trump immediately enter the market. Reputable offshore
brands like FullTilt Poker and PartyPoker would almost
certainly incorporate in the United States and subject
themselves to U.S. market regulation and Government oversight,
including age restrictions.
Customers want to know that they're playing a fair game,
that their bankrolls are secure, and that their privacy is
protected. Companies that set up shop in the United States with
the blessing and encouragement of the U.S. Government will
almost certainly dominate the market. Winning could be taxed.
Market forces and, if necessary, the Federal Government, could
regulate and monitor gaming sites for fairness and
transparency.
Most importantly, if online gambling were decriminalized,
the Federal Government could get out of the trivial business of
breaking up online poker games and Federal law enforcement
officials and prosecutors could expend taxpayer-funded
resources on more appropriate endeavors, like pursuing Internet
or interstate fraud, theft, and protecting the country from
terrorism.
In closing, the Unlawful Internet Gaming Act is a
significant and disturbing and disturbing encroachment on
individual liberty. I'd urge the committee to correct this
overreach and let Americans do as they please within the
privacy of their own homes.
Thank you.
[The prepared statement of Mr. Balko can be found on page
45 of the appendix.]
The Chairman. Thank you.
Next, we have Mr. Gerald Kitchen, the chief executive
officer of the Secure Trading Group. He has worked in a number
of relevant capacities involving the administration of credit
cards.
Mr. Kitchen.
STATEMENT OF GERALD KITCHEN, CHIEF EXECUTIVE, SECURETRADING
GROUP LIMITED
Mr. Kitchen. Mr. Chairman, and distinguished members of the
committee, thank you for the opportunity to provide this
testimony.
I have over 20 years global experience in the card and
payments industry. I have served in various positions during
this time, including as a director of Visa and Master Card,
respectively. Until my current role of chief executive of
SecureTrading, I was the managing director of Barclay Card in
the United Kingdom, one of the largest processors of card and
payment transactions in the world.
SecureTrading is a U.K. company which operates a financial
payments business providing secure processing and settlement of
Internet payments across all sectors of industry.
Mr. Chairman, the card and payment industry is a multi-
layered cooperative and interdependent system that has matured
and continues to mature over many years. This system provides
regulation and compliance policies for consumers, credit card
companies, transaction processes, acquirers, and operators. An
overriding consideration of all participants in this system is
balancing convenience and risk.
In my decades-long experience, it is only in a licensed and
regulated world that we participants are able to enforce such
policies to protect all participants. The aim of the U.K. law
relating to gambling is protection against underage and problem
gambling, protection against consumer and operator fraud, and
finally, protection against money laundering and organized
crime. These objectives have largely been achieved.
Achieving these objectives, however, comes at a price. The
price is investment in appropriate technology and processes to
achieve these regulations. The successful outcome is consumer
protection, and, we believe, freedom of choice. It is far
easier to protect consumers when they use industry issued bank
cards to register and play.
While other forms of payment may be possible, we do not
believe they provide the same degree of security assurance as
that associated with the bank cards. This approach keeps cash
out of the system, a further protection against money
laundering, and also allows player transactions to be tracked
in the case of a dispute, and simplifies regulation.
I will, Mr. Chairman, in this testimony, attempt to address
some of the more obvious concerns being raised here today.
As part of the responsibility of the operator in protecting
against underage gambling and identity theft, strict, and at
times lengthy and inconvenient consumer identity validations
are enforced at both the time of consumer registration and
during ongoing play. These today include production of a
driver's license, a utility bill, and even a passport.
Know your customer or, as we refer to it, KYC, provides a
critical form of protection to the consumer when playing and
when registering. Under prohibition, with unregistered
operators, it is not possible to validate or authenticate that
this practice is being adhered to.
Underage gambling is, without doubt, a concern. As a
father, I, too, share this concern. A further guard against
that is the rules of credit card companies today, who do not
issue cards to minors. In the case that a card is issued to
minors, they can be tracked, as the issuing bank flags these
cards at the time of issue, and subsequent authorization of
credits from such a card is declined when it is received from a
gambling operator in a regulated world.
The challenge of compulsive gambling is not something we
underestimate, nor am I an expert in this field. We do,
however, recognize this problem, and work relentlessly and
responsibly with various support groups and authorities to
protect and attempt to support the vulnerable consumers.
By way of example, operators and processors like ourselves
provide daily limit-setting parameters for consumers to limit
their betting. Operators limit the amount of daily bets
accepted. Consumers can only use one card at a time with an
operator, which further limits credit exposure. Further, too,
we do provide and support access to self-exclusion databases
for consumers to register themselves.
One thing is certain, Mr. Chairman, and members of the
committee. In an unregulated world, the consumer is far more
vulnerable and at risk than in a regulated world. A further
consideration is the question of enforcing laws where certain
jurisdictions opt out from Internet gambling.
Our implementations in place today allow for the exclusion
of customers based on their location, in the event that a
jurisdiction chooses to opt out. The individual's location can
be identified using various forms of IP geo-location
technology. This involves matching the customer's IP address to
a specific State, and in some cases, a city or town.
This evolving technology is provided by a number of third
parties. These systems, under independent audit by companies
such as PWC, are known to provide accuracy up to levels of 99.9
percent at a State level. This accuracy can be further enhanced
by considering IP location together with both the registration
information provided by the customer and the address of the
payment card.
Finally, our collaboration with Baker Tilly, the global
accountancy firm which provides back office processing services
for us, is an important part of the service. We insist that all
gambling operators, and in fact all other potentially high-risk
sectors, like travel, are required to open an escrow account or
a rolling reserve with the back account being under the
independent control of Baker Tilly.
This deposit provides immediate access to funds in the
event of a valid consumer dispute. Further, too, this rolling
reserve provides protection against the risk of money
laundering.
Mr. Chairman, and members of the committee, I thank you for
the opportunity to provide this testimony. I trust that our
experience gives you helpful insight as to how a regulated
environment can work, and why we believe prohibition does not.
Thank you.
[The prepared statement of Mr. Kitchen can be found on page
59 of the appendix.]
The Chairman. Thank you.
By the way, I should have said that without objection, any
written material that any of the witnesses wish to submit will
be made a part of the record.
Next, we have Mr. Jon Prideaux, who is an independent
payments consultant.
Mr. Prideaux.
STATEMENT OF JON PRIDEAUX, CHIEF EXECUTIVE, ASTERION PAYMENTS
Mr. Prideaux. Thank you very much, Mr. Chairman, and
members of the committee. Thank you very much for the honor and
the privilege of giving my testimony to you today.
As you said, my name is Jon Prideaux, I am an independent
payments consultant, and I have nearly 2 decades of experience
in the payments industry in Europe. Most of this was with Visa,
though I should emphasize to the committee that I'm not
speaking on behalf of Visa today.
I've worked together with banks and as a consultant with
payment systems providers and also with marketing companies. I
must tell you that I have never consulted for any Internet
gambling company and I have no plans to do so.
Gambling in Europe, and in the U.K. in particular, is
widely available, both on the main street and also online.
Internet gambling, as has been mentioned, is offered by multi-
billion dollar companies listed on public exchanges that are
well-regulated and their shares are widely held and traded.
To place a bet and to withdraw one's winnings for an
Internet gaming transaction is a multi-stage process. In each
of these stages, there is independent validation and checking.
By definition, Mr. Chairman, in a regulated world, Internet
gamblers cannot be anonymous.
In this electronic medium, they must go through multiple
``know your customer'' stages in order to establish an account,
and will necessarily leave an audit trail of their actions when
they play.
So what are the control processes that are in place in
Europe?
There is an important role for the State. In the U.K., the
National Gambling Commission has the job of ensuring that the
operator plays fair and also that the vulnerable are protected.
And in addition, the Financial Services Authority, or FSA,
the agency in the U.K. which performs an oversight role similar
to that of the Federal Reserve, is charged with protecting the
integrity of the payment system, is charged with ensuring
protection of consumers, and also with minimizing financial
crime.
My own particular expertise, Mr. Chairman, is in the
regulation and compliance programs operated by payment schemes.
Visa, and to the best of my knowledge, Master Card and the
other card companies, operate such regulatory and compliance
programs and regimes directed at various different stages of
the payment process.
The first process is directed at the accurate flagging and
identification of Internet gaming transactions. Controls also
apply at the moment at which transactions are authorized. When
they're cleared through the system, monitoring can be done for
unusual patterns, as can also be done when credits or payouts
are made.
And in addition, as an important safeguard, there is a
possibility to monitor the level of disputes or chargebacks.
So these are the controls, this multi-leg process. What
results do they give, Mr. Chairman?
Well, in my experience in Europe, regulated Internet
gambling transactions are less likely to give rise to a dispute
than e-commerce in general. Certainly, regulated Internet
gambling is significantly less dispute prone than other digital
sales, such as music downloading or Internet service provider
subscriptions.
During my many years as the chairman of Visa Europe's
compliance committee, I can tell you, Mr. Chairman, that I did
become aware from time to time of many different complaints
that consumers had about various aspects of the Visa system.
But during this same period, Mr. Chairman, I can tell you
that I did not receive a complaint, nor was I aware of any
complaint relating to Visa of problem gambling, nor was I aware
of complaints relating to operators cheating their customers on
regulated sites, and neither did our anti-money laundering
procedures cause us to make any suspicious transaction reports
in the regulated sector.
I conclude, therefore, Mr. Chairman, that Internet gambling
can and should be regulated effectively.
The arrival of the Internet, Mr. Chairman, has changed many
industries. The gambling industry is no different. The genie
cannot be put back in the bottle. Internet gambling is a fact.
We must deal with it.
This change of access to gambling has certainly brought
with it new challenges, but, Mr. Chairman, it also brings with
it new tools for management and for control, and a modernized
regulatory regime will surely lead to better outcomes for all
concerned.
It is a matter of incentives, I would say. A prohibition
regime provides incentives for operators to go underground. In
a regulated regime, the incentive is to act responsibly.
Surely, Mr. Chairman, that's what we all want.
Thank you for your time.
[The prepared statement of Mr. Prideaux can be found on
page 71 of the appendix.]
The Chairman. Thank you.
And to introduce the next witness, I'll call on the ranking
member.
Mr. Bachus. Thank you.
Jeff Schmidt is a recognized expert, author, and speaker on
the topics of information security and infrastructure
protection.
He worked with MicroSoft Corporation in the Windows
production security department. He was one of the CIOs of the
Ohio State University, chief information officer. He was the
founder and elected director of the InfoGuard National Members
Alliance, which was the private sector component of the FBI's
InfoGuard program. He's an entrepreneur who has started several
successful ventures in the information security space. He
actually worked with the FBI to start the InfoGuard program in
1998, and received his MBA from Fisher College of Business at
Ohio State University.
I welcome him.
STATEMENT OF JEFF SCHMIDT, CHIEF EXECUTIVE OFFICER, AUTHIS
Mr. Schmidt. Thank you very much, Mr. Chairman, and
committee members. I appreciate the biographical information. I
can now scratch that off of my list here.
I have been in the information security space for the last
15 years, and have focused specifically on identity and
authentication-related issues for the last 3 years.
I come to you today with the luxury of not having an
opinion about Internet gambling. That's not what I'm here to
talk about. I'm a security practitioner, and it's my job to
give you a candid review of the state-of-the-art with respect
to two specific technologies and techniques that we've been
talking a lot about today, namely, identity and age
verification, as well as geographic location or IP geo-
location.
My written submitted testimony contains several pages of
excruciating detail on these particular technologies and
techniques and again, a candid explanation of the state-of-the-
art.
I'm going to skip to the highlights. These technologies are
not reliable in their current form today. Technologies that
attempt to identify a person's age as well as identify their
geographic location will fail on the order of 20 percent.
These numbers come from the vendors of these technologies
themselves. They come from independent parties that have
researched these particular techniques. And they come from my
own research and my company's own research.
Again, 20 percent, I don't know if that's good, bad, or
indifferent for the application that we're talking about today.
It is my job to make sure that the committee is fully informed
about this reality when considering the policy decisions that
are in front of us.
The policy decisions are again, fortunately for me, well
above my pay grade. So the best way to demonstrate this is with
a couple of very simple demonstrations.
On this piece of paper I have written down my user name and
my password, as do 70 percent of all Americans in this country.
Mr. Hogan. Now, Mr. Hogan is Jeff Schmidt. Online, anywhere
else, if that were an age verified credential, Mr. Hogan would
now be my age. It really is that simple, and recent data has
confirmed that.
First of all, ACLU v. Gonzales, with respect to CAPA, did a
lengthy discussion about age verification and identity
verification technologies, and found them to be unreliable.
Also, I would remind the committee that the largest and
most quickly growing complaint to the FTC has consistently been
around identity fraud and identity theft-related issues.
It really is, that is the sad state of affairs right now.
We will see failure rates. Another way to think about what the
failure rates might be is to consider a very simple and very
common age verification problem, the problem that we see when
credentialing a youth at a bar.
According to research done by the University of Wisconsin,
the University of Arizona, and the FBI, use of forged, faked,
or borrowed IDs for the purchase of cigarettes and alcohol
exceeds 20 to 25 percent. Online age verification is a much
harder problem. You're not in person, you're not inspecting a
government-issued ID. Therefore, it is safe for us to assume
that failure rates will be higher in the online scenario.
The second technology that we've discussed is IP geo-
location. The way that the Internet is constructed, it is
extremely difficult to determine the geographical location with
any sort of precision or reliability.
Again, a very simple demonstration. Mr. Chairman, Boston is
one of my very, very favorite cities. I was there yesterday. I
used this Verizon card to access the Internet. I used the same
card again this morning to access the Internet from my hotel
here in the District.
And in both cases, I received different answers from all
the major IP geo-location providers. One had me in Dallas,
Texas; one had me in Reston, Virginia; and one had me in
Minneapolis. In no case did they agree or in no case did they
actually put me in the accurate locations.
Now, I understand that the use of these wireless cards is
somewhat of a curve ball. However, this is the emerging
technology, and this technology is standard equipment in almost
every new laptop that is being built today.
My other personal research around geo-location technologies
has demonstrated failure rates for non-curve ball types of
applications in the 20 to 30 percent range, as well.
So again, it's critical to understand that you will see
very high failure rates and it is critical to factor that in
when making these important policy decisions.
Thank you.
[The prepared statement of Mr. Schmidt can be found on page
81 of the appendix.]
The Chairman. Thank you.
And to introduce our next witness, the gentleman from Ohio.
Mr. LaTourette. Thank you very much, Mr. Chairman. I did
welcome this witness earlier, but Gregory Hogan, Sr., is the
pastor of the First Baptist Church in Barberton, Ohio, which is
in Representative Betty Sutton's district.
He has a Bachelor's Degree in Education from Tennessee
Temple University. He is married with 4 children, and he is
here to talk about the experience of his family and one of his
children.
And so welcome, Reverend Hogan. We look forward to hearing
from you.
STATEMENT OF REVEREND GREGORY J. HOGAN, SR.
Rev. Hogan. Thank you very much.
Chairman Frank, Ranking Member Bachus, my own Congressman,
Mr. LaTourette, and members of the House Financial Services
Committee, thank you for inviting me here today.
As a parent, we dread a call that often comes to us. That
call came to me on December 9, 2005. On the other end of the
line was my son. It was not his cell phone number that showed
up on my wife's phone, but one we did not recognize.
He immediately started crying, and he said, ``I've done
something terribly wrong. I'm in jail for robbing a bank.''
Time stopped. My wife couldn't even drive across the street,
and I do not remember today how we got home from the restaurant
that evening. But my son was under arrest for doing something
that was inconceivable for him.
What could have put my son in a state of mind to do that
act? He was president of the sophomore class at Lehigh
University. He was second-tier cellist in their orchestra. The
high school psychologist who worked with him for 4 years called
him a ``straight arrow.'' And no one who knew Gregory could
believe that he had done such an act.
How could this young man who appeared twice at Carnegie
Hall in New York City think that he could rob a bank? The
answer has to do with illegal Internet gambling.
It all began when a non-student came into his room, walked
over to his computer and said, ``Hey, look how much money I
made on the Internet.'' He keystroked a few things into my
son's computer, and up on the screen popped $120,000. He
downloaded the program so my son could gamble through his
preferred site.
And then for 14 months, we began to watch our son's descent
into the black hole of addiction to Internet gambling,
especially poker. It began when a few overdraft charges showed
up at our house, and our first conversation was on wasting
money and avoiding spending money frivolously.
It included a battle with depression, daily notices from
the banks about overdrafts, and I had to live at a home that I
did not like. I had to take out all the computers in our house.
I had to lock them up. I had to make sure that my wallet was
beside my bedside every night and all my financial papers were
in the safe.
Whenever Greg was around, I had to secure our family
finances, and the TV was always turned to Texas Hold 'em. After
interviews with a certified gambling therapist, with members of
GA, and begging colleges to provide a counselor for him, we
sent Greg back to Lehigh University for his sophomore year.
With him he had taken, without our knowledge, $2,000 in
savings bonds from our family safe, and he began to gamble
again. Greg's student account at the bank in Bethlehem,
Pennsylvania, did not allow Internet payments, so he found an
intermediary site to continue his gambling.
I installed Gamblock, an anti-gambling program, on his
personal computer, and so he began gambling at the Lehigh
University library, up to 12 hours a day. I asked the
university to block his access to the computer, and I was told
that nothing could be done.
By December of 2005, he had been shut out of all the sites
because of bad bank transactions. His fraternity brothers were
asking for their money back so they could buy Christmas gifts
for their families. Greg's grades were slipping. And he was
descending into the pit of addiction. He became two different
people.
The weekend before his arrest, he ran a volleyball
tournament to raise money for the local Boys and Girls Club. He
had to make one more bet. So, with the bravado of a bluffing
gambler, dressed as a typical college sophomore, Greg walked
into a bank, waited in line, passed a note to a teller, and
walked out with the money in his backpack.
He was arrested that evening, as he came into the college
arts center on his way to orchestra practice. Greg has pleaded
guilty to a first-degree felony, and is now serving 22 months
to 10 years in Pennsylvania.
After Greg's arrest, we sent him to a gambling rehab
center, CORE, in Shreveport, Louisiana. He came home and said,
``Dad, you never told me gambling was evil.'' You can't imagine
a Baptist pastor not saying gambling is evil, but I never had
talked that way to my children. He realized how evil it was,
emotionally and intellectually, and how it was damaging so many
lives.
This time next year, instead of watching my son receive his
diploma from Lehigh University as president of his class, I'll
be waiting proudly outside the gates of prison to see my son
released. I will count myself fortunate, because many dads have
stood by the graves of their sons who took more drastic steps
to end their addiction to Internet gambling, such as suicide.
Why tell my personal story for a piece of Federal
legislation? Well, Greg's story is being repeated in so many
young lives. According to the AMA, the APA, up to 5 percent of
all college students will become compulsive gamblers when
exposed to Internet gambling. Are we willing to see up to 16
million new gambling addicts in our Nation?
Greg's story is one that recounts loss. I have met many
people who have $30,000 to $50,000 in online gambling debts.
Many people drop out of college. They drop out of life. They
drop out of society, to pursue online gambling.
The World Series of Poker that's going on this week may be
glamorous, but the life of an addicted gambler on the Internet
is not. It is just a series of broken hopes, promises, dreams,
and lives.
The question I ask this committee today is the same that
the apostle Paul asked the Romans: ``Shall we continue to do
good, or shall we continue to do evil that good may prevail?''
The answer to that, obviously, is no.
Thank you, Mr. Chairman.
[The prepared statement of Reverend Hogan can be found on
page 53 of the appendix.]
The Chairman. Next, Mr. Michael Colopy from Aristotle
International, who manages communications for Aristotle.
And I know you are the first non lawyer, the Wall Street
Journal noted, to be a general partner in a U.S. law firm. I
don't know if you're the last, but you're the first.
Go ahead.
STATEMENT OF MICHAEL COLOPY, SENIOR VICE PRESIDENT,
COMMUNICATIONS, ARISTOTLE, INC.
Mr. Colopy. Thank you, Mr. Chairman. I just want to add to
your comment about John Stuart Mill. Your predecessor, and my
family friend, Bob Drinan, said years ago, referring to how
some of these debates develop, that policy is often formed by
the voices that are heard rather than the realities that exist.
He said, if Rene Descartes were alive today, he wouldn't
say, ``Cogito ergo sum,'' he would say, ``Dico ergo sum''--``I
speak, therefore I am.'' And so, reluctantly drawn by that
dictum, I'm here today.
The Chairman. My predecessor, Father Drinan, was much more
adept at Latin than I, I should acknowledge.
Mr. Colopy. Moving right along, there are so many things
that, in his day and now, have to be elucidated by these
hearings, and that is why Aristotle, the company that is the
leading provider of verification technology for most elected
officials of the United States, and is also now the industry
leader in online age and ID verification, insisted that I
respond to your request and be here today.
So I'm going to make a few generic remarks, and I want to
address some things that are said here today and that are put
about by PR and interested parties in confusing an issue that
must be seen clearly for policy to be framed in a coherent and
an effective manner.
Number one, let's look at what society wants to do, which
presumably is to do the right thing--protect our most
vulnerable members, mitigate risk of fraud and abuse and so on.
And then the second question is, what is the market, what
is the free enterprise system doing to address these issues?
Those are two fundamental questions.
First off, we have to point out the fact that while time
flies, technology rockets forward, that technologies that were
discussed in just the last Congress are now almost obsolete.
I know, for example, that there was a report aired in
November 2005, which I believe we have, right? Let's take a
look at it. This is from ``60 Minutes,'' November 2005.
[A videotape was played.]
Mr. Colopy. Mr. Chairman, many of the points you made
resonate with this report, but as I said, that was in November
of 2005.
``60 Minutes'' re-aired it in November of 2006, because
members here and elsewhere were saying they weren't aware that
there were any technologies available that could age verify and
identity verify.
The court record that was referred to earlier is already
being noted as an example of judicial opinion that is way
behind the times.
Right now, the company that I represent here today,
Aristotle, and others, are doing tens of millions of high-risk
verifications all the time. All of the major motion picture
studios that show R-rated trailers use the verification system
to keep kids out.
Tobacco sales. In the State of Virginia, it's on the books
that you have to have online age verification. We have not had
a single sale get through the system.
California has similar rules. So do--
The Chairman. Internet sales?
Mr. Colopy. Online Internet sales and marketing.
So I'd like to point out that, like 120 years ago, there
was a great cartoon in ``Punch,'' where two wealthy socialites
are rolling along in a carriage, and on all sides of them are
vehicles driving by.
And one fancy lady says to the other, ``They're showoffs.
They say bold things about what they can do.'' That cartoon
applies to much of what I hear being said now about online age
and ID verification.
I'm not making a bid for gaming in any form. I'm simply
saying that we have to have an honest and truthful
representation of what is possible, and that brings me to the
second part of it.
What's the market doing? Why does American Express use it?
Why do 350 major financial institutions use it all the time?
They're not doing it for their health. They're doing it to
mitigate risk. They're doing it to make sure they're not sued
for dealing with underage kids.
On the question of credit cards, by the way, a very
important point should be made. The U.S. operations of Visa,
Master Card, American Express, and others have a prohibition on
the use of credit cards for verification for a very specific
reason--that credit cards were in fact sold and distributed to
many people who are, therefore, underage.
But there are also other reasons why they do not believe
that a credit card by itself is a sufficient proxy for age.
That is a very important point. It's not a sufficient proxy for
age. It is a system with lots of weaknesses if just the credit
card is used.
However, when you use a mix of data, as Nigel Payne
mentioned here, and as others have said, and you use state-of-
the-art technology, including geo-location, which despite what
Mr. Schmidt said here today, which was a technologically
incorrect representation of the technology, you can identify up
to a very high degree the location of an individual from where
they are accessing your site.
I'd like to make another point. Many of these arguments are
put forward by interested parties who don't want to be
inconvenienced by child protection. That should not be taken as
a technological argument. Ours is the leading technology in
this field, but there are many others.
None of us have been surveyed by the opponents of this. The
most definitive paper, by Adam Tier, includes on data, and he
spurned a request to look at the state-of-the-art of online age
and ID verification.
I put that before you when you're listening to these
dramatic tales about how unreliable these systems are.
[The prepared statement of Mr. Colopy can be found on page
49 of the appendix.]
The Chairman. Thank you. If we get to the questioning now,
we may have a chance for a couple of rounds.
I'm struck here, actually. We talked about age, but it does
seem to me, as I listen to the sad stories of some of the
younger people who are involved, that we're not talking about
10 or even 15-year-olds; we're talking about college students.
So first of all, we ought to be clear that the age verification
issue seems to me to be secondary, in that the sad tales we've
heard tend to be young adults.
And whether age verification is good or not good isn't
going to resolve the problem of people who are 18 or beyond,
and then you do get to the philosophical question, do you
prohibit some adults from doing something because a small
number of adults are going to abuse it?
But with regard to age verification, I want to ask Mr.
Schmidt one question. You said that 20 percent was the failure
rate, but you then suggested that it would be much higher by
comparison because you said the FBI statistics are that in
person failure rates for alcohol and cigarettes are higher than
25 percent, and therefore it's probably higher online.
How does that square with your citation of the 20 percent
figure?
Mr. Schmidt. Mr. Chairman, the 20 percent number was a
general number for both cases.
I think you can make a case very strongly that age and ID
verification would fail to that level or greater--
The Chairman. Well, no, I guess--
Mr. Schmidt.--comparison.
The Chairman.--no, if it's 25 percent for in person and it
averages out to 20 percent, online must be below 20 percent,
because how do you get--if you start with 25 percent and you
wind up with 20, somebody has to be below 20.
But I don't want to bog down too much here. I do think
we're not talking age verification.
But I want to ask you this, in the figures that you gave,
you said that it is probably about 25 percent. That's based on
alcohol and cigarettes.
Can I ask, do members of the panel think we should ban the
sale of alcohol and cigarettes online?
Mr. Schmidt, what would you think the incidence is of
underage people buying wine or cigarettes online?
Mr. Schmidt. I'm not aware of any direct research about
incidents--
The Chairman. But you would expect it to be well above 20
percent?
Mr. Schmidt. Well, it's a little different, because there's
a delivery of a physical product, that would increase the rates
of success, that, you know, a bottle a wine or a pack of
cigarettes that showed up. I would expect--
The Chairman. You don't think that children--
Mr. Schmidt.--lower.
The Chairman. You don't think that 15-year-olds clever
enough to get by this couldn't find a place to have the mail
delivered?
Mr. Schmidt. I would expect it to be lower, probably not
dramatically lower, but--
The Chairman. Well, but I do want to make that point, that
my point is this.
You know, we have real reasons and reasons that are
advanced. I think the real reason for this legislation is that
people don't like gambling, and they don't think other people
ought to gamble. I think there is a moral disapproval of
gambling.
And I don't gamble. For one thing, I have a short attention
span, and you can't gamble if you're thinking about something
else. You're going to lose your pants. And that's why I don't
gamble.
But I don't do a lot of things, and I certainly do not
think the world should be restricted to things I like to do.
But to the extent that it is age, here is the great
inconsistency. I have had people who were strong advocates of
this bill, but they're also strong advocates of selling wine
over the Internet.
And, you know, it seems to me, just a clear contradiction
with regard to that, and how people can be for this and talk
about underage, and continue to support the sale of tobacco and
wine, just seems to me to show that's not the real reason.
But let me ask philosophically, because this--and Reverend
Hogan, and I sympathize and admire--the story you told is of an
extremely dedicated parent, the lengths you went to to try and
be supportive and protective of your son.
But would you, if you could, restrict other forms of legal
gambling? People can bet on horses. They can go to lotteries.
And we have certainly had addicts.
I have been in public life for 40 years. I've heard stories
of addictions to gambling when we considered a lottery in the
Massachusetts legislature in the 1970's. People said, ``Don't
do that, there are addicted gamblers.'' Casinos, we talked
about casino gambling in Massachusetts. Again, all in-person
gambling. And so the problem of addiction, a sad problem,
certainly pre-existed the Internet and continues today.
Would you personally propose--you said, you know, that
gambling is evil, or your son said--would you restrict other
forms of gambling that are now legal in the United States?
Rev. Hogan. Thank you, Mr. Chairman.
In 2005, the Media Awareness Network said that 23 percent
of male students in grades 10 and 11 reported visiting a
gambling site, so there is a lot of underage gambling going on,
and I have known families who do that.
In my own personal life, as some people--personally,
myself, I would recommend that no one gamble, because--
The Chairman. So would I, by the way. But the question is,
there is a difference between what we individually would do and
what we would recommend to others, and what we would use the
law enforcement mechanism to enforce.
Would you, given the prevalence of addiction in other parts
of gambling, not just you, or the fact of it, would you legally
ban other forms of gambling that are now legal in the United
States, non-Internet gambling?
Rev. Hogan. I was relieved last year when the Congress
passed the Internet gambling bill, because it reinforced the
Wire Act of 1961. I was relieved because I knew that my son was
doing an illegal activity, and yet it seemed like I was
powerless to stop him from doing it.
We have a principle, I believe, in the government, that we
allow the States to decide these questions, and now you're
trying to make the Federal Government decide the question.
The Chairman. I guess I would differ with you on this, and
I understand, and I admire the lengths to which you went to
work with your son.
But the argument is not one of federalism, in substance, it
is if gambling is wrong and that you get into addiction, and I
guess again, it is--I am not very confident that if you were
able to ban all Internet gambling, that addictive gambling
would go away.
Addictive gambling preceded that, and wouldn't go away, and
if we ban Internet gambling, or increase the effectiveness of
the ban on Internet gambling, because there is addiction, then
I don't understand, again, we let cigarettes and tobacco be
sold on the Internet.
Why don't we shut down all forms of gambling? Because it is
certainly the case that there is a wide range of addiction,
gambling addiction, other than that.
But my time has expired. The gentleman from Alabama.
I'm sorry. I don't mean to--
Rev. Hogan. I'm sorry. Thank you, Mr. Chairman.
I'm an American Baptist pastor, and the American Baptist
denomination has passed a resolution against gambling--
The Chairman. In all forms, legal gambling?
Rev. Hogan.--warning people against gambling that really is
not a profitable aspect of State government.
I used to be employed by a public school district. Our
public school district received very little money from the
State lottery, but the lottery was perceived as the panacea for
paying for public schools.
And I just don't see where gambling is a necessary--
The Chairman. I appreciate the consistency, and I think
that's an honest and consistent answer.
But I don't see one for saying, let's restrict Internet
gambling more, but allow it to go elsewhere.
The gentleman from Alabama.
Mr. Bachus. Thank you, Mr. Chairman.
Mr. Balko, in your testimony, one of the brands that you
singled out for praise was FullTilt Poker?
Mr. Balko. Well, it is one of the more reputable poker--
Mr. Bachus. One of the more reputable firms.
Have you looked at their Web site?
Mr. Balko. Yes, I have.
Mr. Bachus. Did you read--you know, they have the
biographies of some of the players, and you've seen those,
haven't you?
Mr. Balko. I'm familiar with several of the biographies of
the top poker players, yes.
Mr. Bachus. Are you familiar with Ross Boatman's biography
on their Web site?
Mr. Balko. No, I'm not.
Mr. Bachus. Let me tell you about him.
Ross was 10 years old when he played poker for the first
time. His brother Barney, who is a little older than Ross, was
playing with some friends, and after much pleading, they let
him sit in.
His gambling career really didn't get started until a
couple of years later, though, when he was 12 years old. Ross
was too young and didn't have the money to play with those
guys--I guess they're talking about his 14-year-old brother--
but they let him sit and watch, and he learned plenty.
I guess the verification system didn't work.
Mr. Balko. I believe that was well before the age of
Internet gambling, Congressman.
Mr. Bachus. Okay. Was it? I wonder why it's still on the
site today.
Mr. Balko. Well, I think--well, first of all, if I
understand the biography correctly, he didn't actually wager,
he was allowed to sit and watch.
Mr. Bachus. Oh, just sit and watch. Okay.
At 18--this is Howard--deferred college for a year, moved
to New York to pursue his passion.
He discovered poker. He was immediately hooked. For the
next 2 years, he played poker relentlessly, clocking 70 to 80
hours a week. He went home broke 9 nights out of 10. Well,
they're pretty honest about that.
Alan attended UCLA where he planned on pursuing an
engineering degree. While he enjoyed his study, he discovered
playing poker. Soon, the success he experienced led him to
leave school and pursue poker full-time. It's a move he hasn't
regretted. It worked out well for him.
Mr. Balko. Can I respond, Congressman?
Mr. Bachus. What?
Mr. Balko. Can I respond very quickly?
Mr. Bachus. Yes.
Mr. Balko. The second part of the question, I guess, all
occurred after he was 18, and in this country, I think we
recognize 18 as the age of consent to contract.
Mr. Bachus. You know, at 18, in every State in the union,
and I have a letter from attorneys general that I'll introduce
at this time, where they wrote us last year, illegal Internet
gambling that he was doing is prohibited in all 50 States.
I'd like to introduce that for the record.
The Chairman. Reserving the right to object, I guess.
Mr. Bachus. Let me--Mr. Kitchen, you process Internet
gambling payments, your company?
Mr. Kitchen. We process transactions in all industry
sectors, yes.
Mr. Bachus. Okay. So you actually make a lot of money
processing the payments of these illegal Internet gambling
sites?
Mr. Kitchen. We don't process for any illegal companies,
and I'm not sure that the--
Mr. Bachus. They're legal companies, and you can--you're
aware that they're engaging, they're allowing people in the
United States, where it's illegal--are you aware that it's
illegal to gamble over the Internet in the--
Mr. Kitchen. I am aware that companies that we process for
do not take U.S. bets.
Mr. Bachus. Okay. Are you aware that the companies that you
process payments for, that a lot of those payments are people
who are gambling here in our country?
Mr. Kitchen. Will you repeat that, please, sir?
Mr. Bachus. Are you aware that the companies, that some of
the companies that you're processing their payments, you say
they're legal. They're legal in the U.K. But are you aware that
they are gambling sites that are--people in the United States
are gambling on those sites?
Mr. Kitchen. The companies that we process for do not take
bets from U.S. consumers.
Mr. Bachus. Okay. How about the ones that did before the
law passed last year?
Mr. Kitchen. Well, I joined the firm as previously managing
director--joined before the ban, and at that point my company
was doing none of that.
Mr. Bachus. So you don't have any financial interest in any
of these, in any Internet gambling sites?
Mr. Kitchen. Absolutely not. We are a processing company,
and we process transactions--
Mr. Bachus. And you don't do business with Internet
gambling sites?
Mr. Kitchen. We do business with Internet gambling sites
which are legalized and regulated in the United Kingdom.
Mr. Bachus. Okay.
I'd also, Mr. Chairman, like to introduce a letter from the
National Coalition Against Gambling Expansion, and they
actually pointed out again, reminded me in their letter of June
the 6th that it was Mr. Abramoff who lobbied for 10 years
against the bill we passed last year on Internet gambling.
I'd like to introduce it for the record.
The Chairman. Without objection.
Mr. Bachus. And finally, I'd like to introduce a letter
which I received last week from the NFL, major league baseball,
the NBA, the NHL, and the NCAA.
And I'll say this to all members of the panel. Are you all
aware that this Congress in 1992 bipartisanly and
overwhelmingly, with a vote in the Senate of 88 to 5, passed
the Professional and Amateur Sports Protection Act which
prohibits Internet gambling of sporting events online? So it
wasn't actually our bill last year.
Mr. Kitchen, were you aware of that Act? Are you familiar
with that Act?
Mr. Kitchen. I've been asked to comment on the
effectiveness of regulation of the Internet. I'm not aware of
the--
Mr. Bachus. Okay.
Mr. Kitchen. No, I'm not.
Mr. Bachus. I'll just--let me introduce this.
It also points out that--well, their very strong opposition
to this bill today, which they believe will allow, if passed,
that sports betting will likely proliferate and the integrity
of American athletes would be compromised.
Now, that's the NFL, major league baseball, the NBA, the
National Hockey League, and the NCAA.
The Chairman. Was that about steroids?
Mr. Bachus. I'm sorry?
The Chairman. Was that about steroids?
Mr. Bachus. About what?
The Chairman. Was that about steroids?
Mr. Bachus. I couldn't hear you.
The Chairman. Was that about steroids, this letter?
Mr. Bachus. No, but I'll try to get you a letter on that,
if you like.
[Laughter]
The Chairman. The gentleman from Ohio.
Mr. LaTourette. Thank you, Mr. Chairman.
Mr. Chairman, I'm glad that you talked in your questioning
about it's not just underage, and I think that Mr. Hogan,
Reverend Hogan's story does point to the fact that it's a
problem that goes to these people who are maybe away from home
for the first time.
And I mean, I probably shouldn't tell this story in public,
but even though I'm from Ohio, I went to the University of
Michigan, and the reason that I went to the University of
Michigan is, at the time, Michigan had a drinking age that was
18, and Ohio was still 21. It was not a good reason to pick an
educational path, but I benefitted from my degree.
But I think Reverend Hogan's story is not unusual, in
someone being away from home for the first time, with a credit
card, in a dorm room or apparently even after he loads software
onto his computer at the library, and you can do it all night.
And so I appreciate this hearing, and I appreciate your
principled stance.
I have enjoyed this hearing, because it's very rare, we
often have people coming in with different opinions, but unless
I'm wrong, we now have people have different facts, and have a
severe disagreement.
So Mr. Colopy, I understood you, and I think also Mr.
Kitchen, to talk about effective rates of the, let's take the
IP locator technology of 99 percent or some such thing, and Mr.
Schmidt's testimony is a 20 percent failure rate.
So Mr. Colopy, I'll put it as directly as I can, being from
the midwest. I mean, you think that Mr. Schmidt is full of
baloney with his observations?
Mr. Colopy. I only insist on what the evidence shows. What
Mr. Schmidt referred to is no evidence; what we do daily is
evidence.
You know, arguments and PR have no beta test. Data and
companies that use them do. They perform or they're not used.
They're effective or they're not paid for.
No company takes on age verification, the extra burden of a
check, unless it has a direct material impact on benefits to
that company, meaning to their consumers.
So what I'm talking about are facts, and as I mentioned
earlier, in the research that's been bandied about about this
topic, efforts to actually look at real-time online age and
identity verification were not accepted.
No one has never asked us for any information on what we do
that opposes this. That is significant, because public
relations is often damaged by data.
What we're talking about is hard data, what's happening
today, what the marketplace is doing.
Whether you're liberal, moderate, or conservative, in our
society, we have this combination of humane principles and a
market economy.
In both cases, the movement of the market under those
humane principles is toward real-time, effective, robust,
reliable age verification and identity verification.
Mr. LaTourette. Let me ask, and then I'll go to you, Mr.
Schmidt.
I have trouble turning my computer on, so I don't know a
lot of the different things, but there is something called
spooling or spoofing, and when Mr. Schmidt was talking about
using his phone card, in my small world, when we said spoofing,
when I was growing up, it meant playing a joke on your parents,
but apparently now it's a computer term.
Are you indicating that Mr. Schmidt's experience with
whatever he used, and I'll ask him about that again, where he
got three different answers on where he was and none of them
were Boston and Washington, is nothing more than a story that
he's telling?
Mr. Colopy. Again, I can't comment on data I haven't seen
or a fact base that's put before me. I've never seen any of
that information. In prior events like this, there's been no
hard data presented.
The hard data that I see all the time is what the Aristotle
operation shows.
Now, the other important point here is that in doing work,
for example, for the New York State lottery--no offense, Mr.
Chairman, but we actually assist them in complying with
agreements they have with other States.
I don't mean an offense to what you said, but to bring up
that lottery question again, this is a contentious issue, and
as the reverend said, people have different views about it.
But, as an operational matter, which is the only thing I'm
talking about, as an operational matter, it's fundamentally
important that the State of New York know that the purchaser of
that ticket is within the State of New York.
It's also fundamentally important for banking operations,
both internationally and nationally, to know where somebody is
when they're attempting to execute a transaction.
What was said earlier about how unreliable it is does not
square with the facts of 2007, but it probably is relevant to
the facts of 2001.
I'm suggesting that technology in the service of social
good in the private sector is here, it's available, it's
effective, and we should be using it.
Mr. LaTourette. I appreciate that, and just by way of a
commercial, I use your software and have never been fined by
the FSA, so I appreciate it very much.
Mr.--
The Chairman. If the gentleman would yield, for a
representative from Ohio, that's a significant--
[Laughter]
Mr. LaTourette. Well, Mr. Schmidt, let me ask you the same
question, because I listened to your testimony, and I listened
to your story about the IP locator and your experience.
And so is it a fair representation that you and Mr. Colopy
don't agree on this issue, and I guess are you willing to stand
up for yourself, because basically he says that you have--well,
I'm not going to put words in his mouth. You heard him.
So what do you have to say?
Mr. Schmidt. I believe it was full of baloney.
Mr. LaTourette. No, no, no, that was my question. He did
not say you're full of baloney. I asked him if you were full of
baloney and he would not respond in that kind.
Mr. Schmidt. First of all, as an Ohioan who went to
Michigan, I'm having a little trouble over here, as a Buckeye
myself.
Mr. LaTourette. I got it.
Mr. Schmidt. I, in addition, rely on the facts and the
data, and the leading provider of IP go-location data says that
their data is 99 percent accurate to the country, 85 percent
accurate to the city, and 80 percent--I'm sorry--85 percent
accurate to the State, and 80 percent accurate to the city.
That's the leading provider, in their own--so in our
research, and we use, my company uses geo-location data as one
of many factors to determine information.
It cannot be solely relied on, because it is unreliable,
but it is perfectly valid for, you know, one of many factors.
We found reliability in the 70 to 80 percent range, in
general. Again, that's from factual operational experience.
Now, two comments.
First of all, the experience that I had with the wireless
card that I mentioned with respect to D.C. and Boston, that was
with no attempts on my part to actively circumvent the system.
That's a standard issue piece of technology from the
carrier, not unlike the technology that's embedded in many
laptops these days, with no active attempt by the user to
circumvent it. IP geo-location is absolutely trivial for a user
to actively circumvent.
So in addition to its inherent unreliability, with no
active attempt to subvert the system, it is absolutely trivial
to subvert through a whole host of technical measures, none of
which are terribly difficult.
And moreover, anybody with an engineering and technical
understanding of how the Internet works would not disagree with
my statements here. It simply was not designed to allow
geographic location.
It was designed to survive failures, it was designed to
allow, you know, an infinite number of paths between any two
points, and there are a whole host of reasons why, technically
and engineering-wise, it is just not reliable technology.
Mr. LaTourette. Mr. Chairman, I know my light is on. Mr.
Colopy stuck his hand up, and I think he wants to respond to
that.
The Chairman. Go ahead.
Mr. Colopy. I think it's an important point to make that,
just like an automobile does not run alone on its transmission
or on its cylinders, it needs brakes, tailpipe, and the works,
we're talking about a system that, to be effective as age an
identity verification, has many component parts.
These systems, by the way, have several levels of
tolerance, which are set according to the risk confronted. What
they call it is, process matched to risk. Therefore, it is a
complex mix, algorithm if you will, of capabilities that are
adjusted in the cases in which they are used.
It is not appropriate to make any general statement about
all of these cases and give a statistical number without
looking at the context and the set of data you're talking
about.
Again, the data tells the story. The data tells the story
in the marketplace every day, in the tens of millions, where a
lot is at risk. That is what we do.
Mr. LaTourette. Thank you, Mr. Chairman.
The Chairman. The gentleman from Missouri has joined us.
Mr. Cleaver. Thank you, Mr. Chairman. I apologize. I had
another committee hearing.
Thank you for this meeting on gambling.
We had a very lively debate last year when we considered
legislation to address unlawful Internet gambling, and I'm
always in a struggle with these kinds of issues.
I served as the Mayor of Kansas City for 8 years, and
during that 8-year period, we enacted riverboat gaming, which I
did not support as the Mayor. However, I wasn't elected to
serve as the pope of Kansas City, so I signed it into law.
I normally believe that Congress should not be involved in
any way, shape, or form with regard to regulating morals as a
policy or as a practice, so I always struggle when these kinds
of issues surface.
But where there is a longstanding public policy interest in
regulating activities that do harm our society, such as illegal
gambling, then there is an appropriate Federal legislative
role.
I'd like to thank all of you for coming. I apologize for
not hearing your comments, but I do have your comments.
And Mr. Prideaux--hopefully I pronounced that--
Mr. Prideaux. Prideaux, in fact.
Mr. Cleaver. Prideaux--you mentioned that the U.K. is
starting to regulate online gambling.
I wonder how many people are gambling on the regulated
sites versus the ones in countries such as Antigua, that have
fewer regulations, and is there any data available that the
U.K.'s experience with regulating has actually reduced the
problem with regard to gambling behaviors?
Mr. Prideaux. I wish I had precise data, but the weight of
evidence essentially is that gamblers are attracted towards
regulated sites, for a number of reasons.
The first thing is, that gamblers are attracted towards
regulated sites because they know that they're going to be
treated fairly.
I mean, if you're operating in an underground prohibition
environment, where there are sites who are not subject to
regulation, then gamblers have less confidence in the fairness
of the games that they're being offered, and they have less
confidence in the payment scheme they're operating. So, there
is a huge commercial incentive for sites to operate within a
regulated regime.
I think it's also the case, Congressman, that there is
evidence that within a regulated regime, better safeguards can
be put in place to protect vulnerable people playing on sites.
And so you do have this kind of self-reinforcing process,
whereby consumers come to sites that are regulated, and that
tends to capture, as it were, the overwhelming preponderance of
the market.
Mr. Cleaver. Thank you.
You know, talking about this conflict I have anytime
something like this comes up, the Bible actually supports
gambling, which is a bit troubling theologically, but I think,
Reverend, you would agree that there are some rather bold
examples of gambling in the Bible. But my struggle continues,
anyway.
Mr. Balko, you have an interesting blog, theagitator.com.
You recently wrote, ``On Friday, I'll be testifying before
the House Banking Committee in support of Representative Barney
Frank's bill to repeal the Internet gambling ban. I'll be
taking the it's-none-of-the government's-damn-business
position, though I'll probably refrain from using the word
damn.''
I've been your surrogate.
[Laughter]
Mr. Cleaver. If I read this blog correctly, you understand
H.R. 2046 to be a bill that will legalize many forms of
currently illegal gambling and expand the U.S. market for
Internet gambling.
Mr. Balko. Yes.
Mr. Cleaver. Yes. Okay.
Mr. Balko. Yes.
Mr. Cleaver. And so the chairman has invited you here to
testify, so I think that your understanding is instructive.
By contrast, some persons advocating this bill have claimed
that it is designed to be a more effective system for enforcing
U.S. gambling laws.
If this argument were true, and the net effect of us
passing this bill would be less Internet gambling, would you
still support this bill?
Mr. Balko. I'm not sure that this bill would result in less
Internet gambling.
I think, had this bill passed before the Unlawful Internet
Gambling Act passed, I think you may have been correct, but I
think what this bill does is it gives Web site operators a path
to legitimacy and a way to establish legitimacy with consumers,
and it also allows consumers of Internet gambling sites to have
a reputable site where they can wager, knowing that their money
is secure, that they're playing on a fair site, that if
something does happen, they have some recourse.
You know, also, the law that was passed last year didn't
really stop Internet gambling. It put a significant dent in it,
but it still goes on, and it's still fairly easy to place a
wager online.
The difference now is that the companies that are
facilitating the wagers are less reputable, and there are less
avenues for recourse if a consumer is defrauded.
So I think what it's actually done is, like a lot of
prohibitions, it's forced a lot of this stuff underground, and
it's removed some of the market regulation, in addition to a
lot of the government regulations that were in place.
Mr. Cleaver. Thank you, Mr. Chairman.
The Chairman. I'm just going to give myself a second round.
First of all, I'm sorry the ranking member isn't here,
because I want to take very strong exception to what I think
was an unusual breach of appropriateness on his part by noting
that this bill had been opposed, the one that was passed by
Jack Abramoff. That kind of ``McCarthyite'' guilt by
association has no place in this discussion. I did note that my
colleague seemed a little abashed as he was reading it.
But bad people support good things and good people support
bad things, and this is a position I've long held, wholly
unrelated to Mr. Abramoff, and I would not think it would
behoove members of the Republican Party to start tallying up
who more often found themselves on the side of Mr Abramoff.
It's an irrelevancy.
Mr. Balko.
Mr. Balko. I'd actually like to respond to that, because
Mr. Abramoff's name was invoked in the original bill to ban
Internet gambling by the proponents of the bill several times,
and in fact, if you look at the bill that Mr. Abramoff was
pushing, it was actually a prohibition on Internet gambling
with carveouts for the clients that Mr. Abramoff was
representing, including State lotteries. That's exactly the
bill that we have now.
So Mr. Abramoff actually was pushing for the bill that we
have--
The Chairman. Thank you for that correction, and obviously,
it doesn't affect the merits one way or the other.
I do want to get back, first of all, I want to say on
geography, to me that's an irrelevancy.
Mr. Colopy has inspired me to ``Latinize'' a little bit
more, and I think one important set of Latin phrases here is
the distinction between ``mala prohibita'' and ``mala per
se''--something evil only because it is banned and something
which is evil in and of itself.
Gambling to me is clearly ``mala prohibita,'' and underage
gambling, gambling by 12-year-olds and 13-year-olds, I would
say was ``per se.'' That's a bad thing.
Gambling by someone who happens to live in one State rather
than another is simply because of prohibition, so I would
distinguish. I am much more concerned about our ability to do
age distinctions. Geographic distinctions, I cannot understand
why any rational human being would care whether you put the bet
down in one State or another.
And you say what about federalism? We're talking about
national laws. And again, we have been told over and over again
by many people that the Internet, after all, doesn't know
interstate versus intrastate commerce. The Internet is
transcendent of State boundaries, so I would put aside the
geographic location. I think that is irrelevant.
The age one is relevant, but again, I would say, and I just
want to reiterate as we talk, I think even if we had a 100
percent foolproof age cut, that opposition to this--the sides
wouldn't change.
That is, I believe the motivation for trying to further
restrict the ability of people to gamble on the Internet is
based on a moral disapproval of gambling, a fear about
addiction, but all of the examples we've heard about addiction
have been from older people, who are of age.
The last thing I just would want to agree with Mr. Prideaux
about, and this--my basic motivation here is, I spend a lot of
time here, as a Member of Congress, trying to protect people
from other people who would treat them unfairly, certainly
people who would physically abuse them and steal their
property, people who would unduly pollute the atmosphere in
which we all have to live, people who would be economically
exploitative in ways in which you have to come together.
I have no energy left to protect people from themselves.
Adults have to do that without me. And I think once the
government does that, once we accept the principle that we have
the right to protect people from things to which they might
become addicted, our lives would become very much poorer in
terms of the richness of things we could do.
I think it is a terrible mistake to say that government has
an obligation to protect adults from making poor choices in
matters that affect them.
And addiction, there are addictions to gambling, there are
addictions to sex, there are addictions to video games. We've
heard about kids who spend much too much time on video games,
or young adults. There are addictions to alcohol, to tobacco.
We should give people the information with which they can
be told that this is bad for them. We should--I'm prepared to
provide funding through various medical programs to recognize
inability to fight addiction. But banning something because
adults will misuse it in a minority, when it is not otherwise
harmful, is a grave error.
The last thing I would say with regard to Mr. Prideaux, I
would agree with him that intelligently regulating something
may--in that it does take away from the illegal site, and the
best example is, it has been the experience, I believe, in
Massachusetts, and much elsewhere, 30 years ago, before you had
State lotteries, what was called the numbers racket was very
prevalent. People would bet on what number was going to come
out. Maybe it was a parimutuel handle, etc.
I know that has substantially diminished. The existence of
legal lotteries has essentially, in a way that no law
enforcement and no rules could ever have done, substantially
diminished the numbers racket in America, because people do
prefer, most rational people, a legal status.
And, you know, people can be upset about the State
treasurers, they can be upset about the State lottery, but I
know of no State treasurer who has ever broken a kneecap, or
refused to pay when someone hit it.
With that, I have no further questions. Does anybody in the
panel--the gentleman from Ohio.
Mr. LaTourette. Thank you very much, Mr. Chairman.
Just a piece of housekeeping.
The ranking member has asked that I ask unanimous consent
to submit a letter dated today to you and he from Focus on the
Family, and I would ask that it be included in the record.
The Chairman. It's a letter to me from Focus on the Family?
I will treasure that. I get so few of them.
[Laughter]
The Chairman. I thank you. I thank the gentleman.
Mr. LaTourette. It is, in fact, addressed to you and to Mr.
Bachus.
The Chairman. Could I just ask the gentleman, is it signed,
``Yours truly,'' or ``With great affection?''
Mr. LaTourette. Let me just see.
The Chairman. What is that?
Mr. LaTourette. ``Sincerely.''
The Chairman. Oh. Well, all right. That's good.
Mr. LaTourette. If we're doing a second round, does that
mean I can have 5 minutes?
The Chairman. Yes. But let me recognize the gentlewoman
from Indiana first.
Mr. LaTourette. Okay.
The Chairman. And then I'll give the gentleman a second
round. She came in afterwards. The gentlewoman from Indiana.
Ms. Carson. Thank you very much, Mr. Chairman, and members
of the committee.
I come from Indianapolis, Indiana, probably the State that
has more gambling casinos than any other State in the United
States.
I have a question in terms of consistency.
The race, the Kentucky Derby held in Louisville, Kentucky,
you could bet on it from anywhere in Indiana, by computer.
According to the question, what's the difference between
Internet gambling and being able to gamble on the horses?
Could one of you refined gentlemen answer that question for
me, please?
You're not going to answer?
Mr. Kitchen. I'm not sure there is a difference.
Ms. Carson. I'm not, either. That's why I'm confused.
[Laughter]
Mr. Kitchen. I think we all are.
Rev. Hogan. Madam Congresswoman, to me, as the chairman
said to me, last November in Ohio, we had an issue on the
ballot which basically would allow slot machines in Ohio. The
vast majority of Ohioans said no to that.
And the vast majority of Ohioans also said yes to the
election of Mr. Brown to the Senate, which gives your party--
helps them quite a bit to have a majority in the Senate.
Ms. Carson. How do you know what party I'm with?
Rev. Hogan. You're on that side of the room.
[Laughter]
Rev. Hogan. But coming down to this issue, I think the
issue of this bill is that in Ohio, we said no, but West
Virginia said yes, and I have friends who drive down to West
Virginia. I don't think we should put roadblocks over the West
Virginia border saying you can't go play slot machines in West
Virginia.
But the issue is, with the Internet gambling, the situation
has been, we do not want to see bets put across State lines. I
know that they made an exception for horse racing, and now
we're not going to discuss the wisdom in that, but still, right
now, we're actually expanding that, so why should we have more
of it?
And the issue is now it is illegal, it has been illegal
since 1961 before Al Gore invented the Internet, and it's going
to--and we want to continue to keep it at that standing there.
So that's why I'm saying, I would love to see every
individual locality continue being consistent, the Federal
Government being consistent, and allowing the locals to decide
what they want to do, and we've all said Internet gambling is
illegal in all 50 States, or at least the majority of them.
Thank you.
Ms. Carson. Thank you.
I know I have heard objections to this for family reasons,
because they feel like they'll gamble all their money before
they bring the paycheck home to their spouses, but they do that
now. It doesn't require Internet gambling to make some
irresponsible person not accommodate his or her
responsibilities first for the family.
But I'm still confused on how you can bet at a racetrack--
you go up, they put your numbers in by computer, give you a
receipt, and in this situation, beginning with this
legislation, you can do it over the Internet, either by credit
card or whatever kind of card you use.
And I guess the bottom line, and I don't want to belabor
the point, is why are we debating this? People gamble because
they want to gamble.
As long as it's consensual adults gambling, whether they're
being responsible or not responsible--wouldn't it be wonderful
if we could legislate responsibility among human beings of age?
We can't do it.
So while I think I voted for restrictions the last time--
and I don't feel hypocritical, either--I just think more time
has passed, and you understand better what it is that you're
trying to do.
We have changed a lot of laws, reversed a lot, and I don't
know what the chairman is going to do with this one, but if he
wants to repeal what we did, I'm going to vote to repeal it,
because it just doesn't make any sense, to me. But I'm not the
brightest star in the galaxy, either, so I have to have some
help.
I've enjoyed the testimony. Believe it or not, I've read
it. And I thank you very much.
The Chairman. I thank the gentlewoman for her support, and
I would caution the witnesses, if they haven't already figured
this out, that it is when the gentlewoman from Indiana is at
her most self-deprecatory, that I would be very careful, if I
were you.
[Laughter]
The Chairman. The gentleman from Ohio.
Mr. LaTourette. Thank you very much, Mr. Chairman.
And Reverend, most of the folks who live in the northern
part of the district where I am, in Lake County, go to Niagara
Falls instead of West Virginia, but now they can't get
passports, so there will probably be more of them going down to
West Virginia.
And I want to associate myself with the remarks of the
chairman on Mr. Abramoff. A lot of the stuff that goes around
reminds me of gang reporting, the way they used to in the
1920's and the 1930's, and I really think it's disgusting, and
as I said on the Floor the other night, even though I didn't
get a lot of converts to join me, I really think that we're
engaged in a race to the bottom on some of these things. People
who do bad things should be punished, and they have.
But Mr. Prideaux, I want to focus on Page 8 of your
testimony, and get to the compulsive gambler. I think we've
talked about the technology, we've talked about the underage
problem, but the compulsive person.
And you talk about velocity controls, and maybe somebody
else talked about velocity controls.
I know, even though it pisses me off, sometimes I go to an
ATM and it only lets me take out $200 of my own money, then
charges me $2.50 for the privilege of giving me my own money
back, but they won't give me $300, they'll give me $200.
And so it seems to me that may be a way to deal with the
compulsion problem, and I'm not aware of any constitutional
right to be able to not only bet online, but bet a lot of money
online.
Can you describe for me what you mean about the velocity
controls and how that's utilized in your experience relative to
online gambling?
Mr. Prideaux. Yes. Thank you, Congressman.
In essence, though, I mean, if I could just interpret your
question a little broadly, and talk about velocity controls in
general--and clearly, some can be applied by the payment
scheme, I think as you have said, particularly for credit
cards, where gaming transactions are considered quasi-cash.
The risk profile that issuers take is to not extend the
whole of a credit line for quasi-cash style transactions, and
certainly that's one mechanism as far as the payment scheme
that can operate, that can provide some safeguards to the
problem of compulsive gambling.
At the same time, I mentioned in my testimony that there
was a multi-layered approach from this. I think there are a
number of other important aspects to talk about.
The first one, of course, is that of the operator
themselves acting in their self-interest, and the majority of
reputable regulated sites will establish limits for new players
to the extent that they can play, and indeed, they will also
make available to players the ability for that individual to
self-limit, a sort of a cooling off period.
And of course, the regulators themselves, if they felt it
was appropriate, could enforce some of these mechanisms.
I think the point that I want to make is that we talked
about how the Internet was transforming businesses, and clearly
it transforms the Internet. And they also have access based
controls, being substituted by these controls here, to address
compulsive gambling.
None of the features that I've described have really been
available in the face-to-face gaming environment. This is a
good example of a place where the problem of compulsive
gambling which exists today can be better controlled in a
regulated environment for Internet gambling as opposed to
gambling in the face-to-face environment.
Mr. LaTourette. Thank you.
And just my last question relative to the bill that the
chairman has put forward, I understood from your testimony that
in the United Kingdom, the Gambling Commission regulates the
gambling activities, while the Financial Services Authority has
no particular responsibility for gambling.
As I understand the chairman's bill, the Treasury
Department takes responsibility for the financial transactions,
which it obviously knows, but it doesn't know much about
gambling, I would assume.
Have you looked at the chairman's bill, and have you had
the chance to compare his proposed regulatory scheme to the one
that exists in the United Kingdom that you are familiar with?
Mr. Prideaux. I must profess that I'm not an expert in the
regulatory apparatus of the United States, but to the extent
that I have looked at the bill, it does seem to me that the
same twin regulatory structures of the financial system on the
one hand and of the gambling perspective on the other do seem
to be features of the chairman's bill.
Mr. LaTourette. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. If the gentleman would yield--because there
was a concern raised when the bill was passed about money
laundering, terrorism, etc. That's why we did assign the FinCen
operation there.
I thank the members for participating on a Friday. Frankly,
I like Friday hearings. The fewer members you have, the more
you can get in.
I thank the witnesses. It is a topic on which reasonable
people can differ. I think, on the whole, we have done that
today.
Before we adjourn, I am going to ask for a blanket
unanimous consent to insert various statements into the record.
I have one from our colleague, Congresswoman Berkeley, from the
United Methodist Church, and one from the National Coalition on
Gaming, basically agreeing with the point Mr. Prideaux made
about how to do this, and I know that on the Republican side,
there are also a number of statements, o we'll get unanimous
consent to put those statements into the record.
And with that, the hearing is adjourned.
[Whereupon, at 12:02 p.m., the hearing was adjourned.]
A P P E N D I X
June 8, 2007
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