S. HRG. 105-182 THE INTERNET GAMBLING ACT OF 1997 oc, 4.J89/2: .HRG, 105-182 HEARING BEFORE THE SUBCOMMITTEE ON TECHNOLOGY, TERRORISM, AND GOVERNMENT INFORMATION OFTHE COMMITTEE ON JUDICIAKY TH^ UNITED STATES SENATE ONE HUNDRED FIFTH CONGRESS FIRST SESSION ON S.474 A BILL TO AMEND SECTIONS 1081 AND 1084 OF TITLE 18, UNITED STATES CODE DEPOSITORY JULY 28, 1997 MOV 1 7 199/ Printed for the use of the Committee on the Judiciary U.S. GOVERNMENT PRINTING OFFICE 44-066CC WASHINGTON : 1997 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-055660-0 UNIVERSITY Of ttJJ_NQS UBRAR* ffi COMMITTEE ON THE JUDICIARY ORRIN G. HATCH, Utah, Chairman STROM THURMOND, South Carolina PATRICKJ. LEAHY, Vermont CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, JR., Delaware FRED THOMPSON, Tennessee HERBERT KOHL, Wisconsin JON KYL, Arizona DIANNE FEINSTEIN, California MIKE DEWINE, Ohio RUSSELL D. FEINGOLD, Wisconsin JOHNASHCROFT, Missouri RICHARD J. DURBIN, Illinois SPENCERABRAHAM, Michigan ROBERT G. TORRICELLI, New Jersey JEFF SESSIONS, Alabama MANUS COONEY, ChiefCounsel and StaffDirector BRUCE A. COHEN, Minority ChiefCounsel SUBCOMMITTEE ON TECHNOLOGY, TERRORISM, AND GOVERNMENT INFORMATION JON KYL,Arizona, Chairman ORRIN G. HATCH, Utah DIANNE FEINSTEIN, California ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, JR., Delaware FRED THOMPSON, Tennessee RICHARD J. DURBIN, Illinois STEPHEN HIGGINS, ChiefCounsel NEIL QUINTER, Minority ChiefCounsel (H) poe, W. 5-HK6-. (05- CONTENTS STATEMENTS OF COMMITTEE MEMBERS Page Kyi, Hon. Jon,U.S. SenatorfromtheStateofArizona 1 CHRONOLOGICAL LIST OF WITNESSES Panel consisting of Hon. Richard H. Bryan, U.S. Senator from the State of Nevada; and James E. Doyle, attorney general, State of Wisconsin, onbehalfoftheNationalAssociationofAttorneys General 5 Panel consisting of Jeff Pash, executive vice president, National Football tLheaognuyeC;abAontn, LGieoenre,l,cShaaiwry,erC,oaalintdioCnolAlignasi,nsLtasGVaemgbalsi,nNgVExpansion; and An- 14 ALPHABETICAL LIST AND MATERIAL SUBMITTED Bryan, RichardH.: Testimony 5 Cabot,Anthony: Testimony 23 Doyle,JamesE.: Testimony 7 Prepared statement 10 Geer,Ann: Testimony 17 Preparedstatement 18 Questions and Answers on Internet gambling and S. 474, the InternetGamblingProhibitionAct 20 Kyi, Hon. Jon: Prepared statement of Hon. Mitch McConnell, U.S. Senator fromthe State ofKentucky 3 Pash,Jeff: Testimony 14 APPENDIX PROPOSED LEGISLATION S. 474, a bill to amend sections 1081 and 1084 of title 18, United States Code 31 ADDITIONAL SUBMISSIONS FOR THE RECORD Preparedstatementsof: Hon. BobGraham,U.S. Senatorfromthe StateofFlorida 38 Lettersfrom: Robert A. Butterworth, attorney general of Florida, dated Feb. 17, 1997 38 JamesT. Moore, commissionerofFlorida, datedJuly29, 1997 .... 38 StatementregardingInternetgambling, datedOct. 18, 1995 39 JayCohen, president, CEO, WorldSportsExchange 41 TheAmericanHorse Council 43 InteractiveGamingCouncil, Interactive ServicesAssociation 46 Interactive GamingCouncilissuescodeofconduct 48 (III) . , THE INTERNET GAMBLING PROHIBITION ACT OF 1997 MONDAY, JULY 28, 1997 ,, U.S. SENATE, SUBCOMMITTEE ON TECHNOLOGY, TERRORISM, AND GOVERNMENT INFORMATION COMMITTEE ON THE JUDICIARY, Washington, DC. The subcommittee met, pursuant to notice, at 2:02 p.m., in room SD-226, Dirksen Senate Office Building, Hon. Jon Kyi (chairman ofthe subcommittee) presiding. OPENING STATEMENT OF HON. JONKYL,AU.S. SENATOR FROMTHE STATE OFARIZONA Senator KYL. This hearing of the Judiciary Committee Sub- committee on Technology, Terrorism, and Government Information will come to order. We are pleased today to have before us a bill which both the ranking member, Senator Feinstein, and I have sponsored, the Internet Gambling Prohibition Act of 1997. Let me state at the out- set that Senator Feinstein had very much hoped to be here. She is traveling today and will not be able to join us, but fortunately she has assisted in developing our panel for today and we appre- ciate that, and I will have more to say about that injust a moment. Let me begin with a briefstatement about the nature ofthis leg- islation and then call upon our first two witnesses, both very dis- tinguished public servants in their own right. Gambling on the Internet is rapidly becoming a big problem. It is a $1 million a year activity that is unregulated and largely ille- gal if done in other venues. Some experts predict that it will take billions ofdollars by the turn ofthe century. Historically, States have had the ability to either prohibit gam- bling or strictly regulate it within their borders. Gambling across State lines is illegal, but the advent ofthe Internet has created the opportunity to gamble in a manner that is not specifically covered by our laws and the potential for fraud and abuse ofInternet gam- bling is significant. The pervasiveness ofgambling in our society is shown by the fact that Gamblers Anonymous added over 400 new chapters in Amer- ica between 1990 and 1995. The problem will become worse as gambling expands to new venues. There are already hundreds of gambling-related sites available to users of the Internet. That in- cludes sites for Blackjack, craps, roulette, and sports betting. Any- one with a computer and a modem has access to a casino, and vir- (i) . * B I* tual casinos make it easier for those with gambling addictions to sink deeper into debt and despair because all they have to do is sit down and log on. It is what Robert Goodman, uroan planning pro- fessor at Hampshire College, calls the hardcore crack cocaine of gambling. Placing a sports bet from one State to another via the telephone has been illegal for many years. Yet, nonsports betting has been in- terpreted as permissible on the Internet. This bill is therefore nec- essary for the legal system to keep pace with technology. Senate bill 474 dispels any ambiguity by making clear that all betting, not just sports betting, will be illegal if conducted on the Internet. It clarifies the definition of bets and wagers to ensure that those who are gambling cannot circumvent the law. For exam- ple, virtual gaming ousinesses have been known to offer prizes in- stead ofmoney in an attempt to evade the law. The bill's most important provision permits Federal, State and local law enforcement officials to request or, by court order, to re- quire both the telephone company and the Internet service provider to pull the plug on any Internet gambling business among their customers. The National Association ofAttorneys General believes that this provision will be a very effective deterrent. An example: Let us say the attorney general of Arizona, after gathering the proper evidence, discovers that a gambling site cre- ated in another country is enticing citizens ofArizona to bet on the site. Ifpur bill becomes law, the attorney general could go to Amer- ica Online or to US West with a court order and require those busi- nesses to cut off service to the site in question. Too often, illicit op- erators of virtual casinos set up shop in friendly jurisdictions be- yond the directjurisdiction ofU.S. law. Now, opponents ofour bill have argued that it is too soon to con- sider legislation on Internet gambling; that the National Commis- sion on Gambling might make some recommendations about it. If this were an overly complicated matter, that might be a proper course of action. But this bill is essentially a very straightforward application of existing law to a new venue. Moreover, we need to pass legislation now to prevent online gambling from mushrooming out ofcontrol. At our subcommittee's hearing on Internet crimes, Wisconsin at- torney general and chairman of NAAG, Jim Doyle, testified that the States are right on the verge of seeing Internet gambling com- pletely mushroom. He also said that he and his colleagues want legislation which would allow the Federal Government to take the lead in law enforcement action against gambling on the Internet. The National Commission has not even begun its work yet. While it has been close to a year since the Gambling Commission was es- tablished, the last vacancies were filled only last month. Finally, it is unclear to what extent the commission will study Internet gam- bling. It is likely that it will be a low priority behind such issues as casino, riverboat, and Indian reservation gambling. There is growing support for changes in the current law. The Na- tional Association ofAttorneys General has a task force on Internet gambling and the report of the task force, authored by Attorneys General Dan Lungren and Hubert Humphrey, called for a legisla- tive remedy to stem the tide ofelectronic gambling. NAAG has en- 3 dorsed our bill, as has the Federal Bureau ofInvestigation. Accord- ing to MSNBC, others, including the Christian Coalition and Ralph Nader's consumer protection group, which probably agree on very little, support this legislation. Since we have had the bill out for comment, we have received some good suggestions, as a result of which we have made some changes to the bill. First, we have increased the penalties for those who are convicted of operating online gambling businesses from a $10,000 fine and up to 2 years in jail to a $20,000 fine and up to 4 years in jail. These are the operators whose potential take is so large that a meaningful penalty is required to dissuade them from engaging in the Second, those awchtioviptly.ace a bet with a professional gambling oper- ation, to which I just referred, will be subject to a fine of up to $2,500 and 6 months injail. So opponents ofour bill will no longer be able to argue that we are penalizing the casual bettor. We are not doing that in the bill. Additionally, we have added a sense ofthe Senate component to the bill which encourages the President to negotiate agreements with other countries to allow U.S. officials to prosecute those who are coordinating bets to U.S. citizens from outside the United States. And, finally, we have written exceptions into the law to en- sure that those activities that the States have deemed legal will continue to be permitted. The bill specifically exempts information used for news reporting, bets or wagers between persons where it is legal in the State where the bet is transmitted and received, and information used to assist bets or wagers where it is legal in the State where the bet is transmitted and received. In short, our legislation simply updates the law by extending ex- isting prohibitions on gambling to the Internet. Society has always prohibited most forms of gambling because it can have a devastat- ing effect on people and families, and it leads to other crime and corruption if not strictly regulated. Extending the prohibition on gambling on the Internet is no different than extending it to the telephone or wire, as happened when those innovations came along. The Internet offers fantastic opportunities. Unfortunately, some would exploit those opportunities to commit crimes and take ad- vantage of others. Illegal acts should be prohibited wherever they We occur, including in cyberspace. are convinced that the Internet Gambling Prohibition Act will help to curb the spread of online gambling, and I look forward to hearing the testimony of our wit- nesses. We will have statements from other Senators inserted into the rSeecnoartdo.rWMecCwoinllneklelepfrtohme rKeecnotrudcokpyehnafsoroftfheartedpuarpsotsaet.emFeonrt.exWaempwliel,l submit that. [The prepared statement ofSenator McConnell follows:] PREPAREDSTATEMENTOFHON. MITCHMCCONNELL,AU.S. SENATORFROMTHE STATE OFKENTUCKY STATEMENTONS. 474 INTERNETGAMBLINGPROHIBITIONACT Senator Kyi, this is important legislation that the Subcommittee is reviewing today, andIappreciatetheopportunitytooffermyviews. Communication today is very complicated in our highly complex and ever-chang- ing technological world. The Internet has grown dramatically over the last several years andis expected tobe availabletoseveral hundredmillionindividualsby 2000. Alongwiththewonderful opportunitiesthisbrings, italsobringsgreatconcerns. Oneofthoseconcernsis the abilityto offerwide-open, unregulatedgambling, par- ticularly from outside thejurisdiction ofthe United States' authority. I applaud the sponsors ofthis legislation for recognizing this and trying to give states the tools necessaryto enforcetheirowngamblinglaws. One industry that is important to my state, and the country, is horse racing and breeding. Nationally, this great sport involves 725,000 horses and nearly a million participants; it generates $34 billion in annual revenue and supports nearly a half- millionjobs. In my state ofKentucky, itis a $3.4 billion industrythat involves over 75,000horses and supports 53,000full-timejobs. Parimutuel horse racing presently operates in 37 states with on-track, off-track, and inter-track wagering. Like others, the horse racing industry has had to adapt and change dramatically in the face ofexploding competition and new technology. Just one example ofthat adjustment is that over fifty percent ofall wagers made onracingtodayaremadeatfacilities otherthanwheretheraceitselfisrun. Telephone wagering on parimutuel racing is authorized and offered in various states. My state ofKentucky has been conducting telephone wagering in a limited way for some years with the likelihood itwill be expanded overtime. NewYork has authorizedsuchwageringforover 15years, andOregonhasjustapprovedit. Racetracks, horseassociations andprivatebusinesseshavebeenofferinginforma- tiononthe sportthrough various traditional and more technological mediaforsome time. All ofthis has developed under strict governmental licensing and regulation, including Section 1084 ofthe United States Code, the so-called wire statute, which thislegislationwouldamend. The regulated and licensedparimutuel horse racing industry agrees with the un- derlyingpremise ofthis legislation: That the regulation ofgambling is essential to protect statepolicies and revenues. The racing industry wants to control its product and the integrity ofracing. It does not want unlicensed entities using its product forunregulatedgambling, whetherontheInternetorotherwise. The racing and breeding industry is concerned, however, that changes to Section 1084 might adversely impact the developments in racing and what it hopes to do in the future. I know that you and your staff have endeavored to ensure that changes to the wire statute underthis legislation will not adverselyimpact the rac- ing and breeding industry, or may be done in the future, under state licensing and regulation. I appreciatedthat. I applaud your work on this legislation and, although not a member ofthe Com- mittee, hope to work with you and the other members to craft legislation that will give state law enforcement authorities and officials the ability to enforce their own gamblinglawsinthefast-changingtechnicalworldoftoday. Thankyouverymuch. Senator KYL. Ofcourse, any statements that are made by people testifying before the panel will be included in the record as well. It is now my privilege to introduce one ofmy colleagues, Senator Richard Bryan, who has served the State of Nevada for a long time. He was State attorney general from 1978 to 1982, so he knows these kinds of law enforcement issues well. He was elected governor in 1982, and reelected in 1986. So he is clearly knowl- edgeable ofthat State's significant regulation and operation oflegal gambling activity. Senator Bryan won his current seat in the U.S. Senate in 1988 and was reelected to his second term in 1994. Senator Bryan, we are delighted that you are here and we are happy to take your testimony at this time. PANEL CONSISTING OF HON. RICHARD H. BRYAN, A U.S. SEN- ATOR FROM THE STATE OF NEVADA; AND JAMES E. DOYLE, ATTORNEY GENERAL, STATE OF WISCONSIN, ON BEHALF OF THE NATIONALASSOCIATION OFATTORNEYS GENERAL STATEMENT OF HON. RICHARD H. BRYAN Senator BRYAN. Thank you very much, Mr. Chairman. I appre- ciate the opportunity to appear here before you on the Internet Gambling Prohibition Act, and I would like to commend you for in- troducing this legislation and scheduling this hearing today. Mr. Chairman, I want to say at the outset that I strongly oppose gaming on the Internet and I support your legislation to prohibit it. There are currently 50 million households in the United States with computers, and 25 million of those computers have access to the Internet. Most experts are predicting an explosion in the growth of families hooked up to the Internet. In fact, most schools and libraries will be online by the turn ofthe century. Unlike the heavily regulated casinos in Nevada, Internet wager- ing is unregulated, and since many of these sites operate offshore, it is beyond the reach of U.S. authorities. Such a scenario is ripe for consumer fraud. The greatest danger posed by Internet gam- bling is that there is no way to control it and there is no way to regulate it. Gaming should be a regulated, adult recreational activ- ity, and there is no fool-proof way of ensuring that children can't access the Internet gambling site. Our experience with 900 numbers offers a preview ofthe dangers of Internet gambling. In most instances, it was not until parents received enormous phone bills for these services that they realized that their children had been exposed to what was frequently adult- oriented material. In Nevada, one of our most important gaming regulations is a ban on gambling until age 21. Over the Internet, there is simply no effective way to prohibit access by children. Your legislation, Mr. Chairman, updates our communications statutes to keep pace with the new technology. Current law pro- hibits gaming through the mail or over the telephone, but the exist- ence and growing popularity ofnew forms ofelectronic communica- tions, such as the Internet, have created huge loopholes in these statutes. The legislation builds upon existing communications laws. What is now legal on other forms of electronic transmission will remain legal, and what is now illegal on other forms of electronic commu- nication will become illegal on the Internet as well. By simply mod- ernizing and updating the current prohibitions ofthe Wire Act, the legislation before your subcommittee today eliminates gaming on the Internet. Your legislation, Mr. Chairman, protects the legiti- mate business interest of the Internet by the legalized gaming in- dustry, as you have pointed out, but prohibits the conduct of gam- ing over the Internet. As a former governor and attorney general ofNevada, I strongly support the rights of States to make individual determinations within their own State boundaries as to the kinds ofactivities that may be conducted within those borders. Some States have chosen to permit gaming and others have chosen to prohibit it. That should be their choice. By its very nature, the Internet cannot be 6 constrained by State or national boundaries. It is physically impos- sible for any State to regulate gaming on the Internet and the only responsible choice Congress can make is to simply prohibit it. I am a strong supporter of the legalized and regulated gaming industry in my own State. Gaming in Nevada is vigorously regu- lated and is an essential ingredient ofNevada's success as a world- class destination. Nevertheless, bringing gaming directly into peo- ple's homes, as we are beginning to see through the Internet, is so full ofpotential problems and so far beyond the ability ofany State to regulate it that despite whatever business potential it may have, it needs to be prohibited on a national level. Mr. Chairman, may I say that I have had experience with deal- ing with gaming regulation in Nevada for several decades. I simply have no confidence whatsoever that gaming on the Internet can be regulated now or at any time in the future. I would like to conclude as I began by indicating my strong opposition to gaming over the Internet and to urge this committee and the Congress to act quick- ly to enact the legislation before you today. Let mejust say I personally commend you, Mr. Chairman. I have enjoyed our working relationship in crafting this piece of legisla- tion. I think you have done an extraordinarily effective job in bal- ancing the various competing interests. This is legislation that is not complicated, as you point out. I think its policy message is clear, and the sooner that we can enact this, I think, the better for all. Senator KYL. Thank you very much, Senator Bryan, and I would note that you have been very helpful in helping us to shape the leg- islation. Because ofyour expertise in trying to handle the gambling matters appropriately, when that can be done at the State level, we have certainly called upon you. I have no specific questions to ask you because you have been kind enough to provide your input to us already. You are welcome to continue to remain here at the hearing and to hear the testi- mony ofothers, or ifyou need to go, I willjust leave it to your dis- cretion to leave when you feel that is appropriate. Senator BRYAN. Mr. Chairman, I appreciate it. As a former attor- ney general, I think I should remain to hear General Doyle's com- ments. Senator KYL. And you will enjoy that. We have had General Doyle appear before us previously, including on this issue, but on consumer fraud issues generally. He has been a leader in the area. He has been very helpful to our committee, and he is representing the National Association ofAttorneys General now, so we are very happy to have him with us. Mr. Doyle is the attorney general for the State of Wisconsin, a position he has held since 1991. He is the current chairman ofthe National Association ofAttorneys General. Prior to that, he chaired NAAG's Internet Gambling Subcommittee. The attorney general appeared before the subcommittee earlier this year at our hearing on Internet crimes. Again, Attorney General, welcome.