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42–714 PDF 2008

PROPOSED UIGEA REGULATIONS:

BURDEN WITHOUT BENEFIT?

HEARING

BEFORE THE

SUBCOMMITTEE ON

DOMESTIC AND INTERNATIONAL

MONETARY POLICY, TRADE, AND TECHNOLOGY

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

APRIL 2, 2008

Printed for the use of the Committee on Financial Services

Serial No. 110–102

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES A. WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

DEAN HELLER, Nevada

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY, TRADE, AND

TECHNOLOGY

LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York 

MAXINE WATERS, California 

PAUL E. KANJORSKI, Pennsylvania 

BRAD SHERMAN, California 

GWEN MOORE, Wisconsin 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

WM. LACY CLAY, Missouri 

KEITH ELLISON, Minnesota 

CHARLES A. WILSON, Ohio 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

RON PAUL, Texas 

MICHAEL N. CASTLE, Delaware 

FRANK D. LUCAS, Oklahoma 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JEB HENSARLING, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

DEAN HELLER, Nevada 

(V)

C O N T E N T S 

Page 

Hearing held on: 

April 2, 2008 ..................................................................................................... 1

Appendix: 

April 2, 2008 ..................................................................................................... 39

WITNESSES 

WEDNESDAY, APRIL 2, 2008

Abend, Valerie, Deputy Assistant Secretary for Critical Infrastructure Protection and Compliance Policy, U.S. Department of the Treasury ....................... 10

Abernathy, Wayne A., Executive Vice President, Financial Institutions Policy 

and Regulatory Affairs, American Bankers Association (ABA) ....................... 29

Kitada, Ted Teruo, Senior Company Counsel, Legal Group, Wells Fargo & 

Company ............................................................................................................... 32

May, Harriet, President and CEO, GECU of El Paso, Texas, on behalf of 

the Credit Union National Association (CUNA) ................................................ 27

Roseman, Louise L., Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors of the Federal Reserve System ................ 8

Williams, Leigh, BITS President, the Financial Services Roundtable ................ 30

APPENDIX 

Prepared statements: 

Gutierrez, Hon. Luis ......................................................................................... 40

Paul, Hon. Ron .................................................................................................. 42

Abend, Valerie .................................................................................................. 43

Abernathy, Wayne A. ....................................................................................... 45

Kitada, Ted Teruo ............................................................................................ 59

May, Harriet ..................................................................................................... 91

Roseman, Louise L. .......................................................................................... 95

Williams, Leigh ................................................................................................. 105

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Gutierrez, Hon. Luis: 

Letter from Americans for Tax Reform, dated April 1, 2008 ........................ 119

Letter to Hon. Jim Nussle, OMB, from a coalition of organizations, dated 

December 10, 2007 ........................................................................................ 120

Letter to Chairman Gutierrez and Ranking Member Paul from Chamber 

of Commerce of the United States of America, dated April 1, 2008 ......... 122

Letter to Chairman Gutierrez and Ranking Member Paul from the Center 

for Regulatory Effectiveness, dated March 31, 2008 .................................. 125

Notice of Office of Management and Budget Action, dated February 1, 

2008 ................................................................................................................ 128

Statement of Marcia Z. Sullivan on behalf of the Consumer Bankers 

Association, dated April 2, 2008 .................................................................. 129

Letter to Chairman Gutierrez from the National Association of Federal 

Credit Unions, dated April 1, 2008 ............................................................. 134

Statement of Rick Smith, UC Group Limited, dated April 2, 2008 ............. 136

Letter to Jennifer Johnson and Valerie Abend from the Office of Advocacy 

of the U.S. Small Business Administration, dated December 12, 2007 ... 159

Statement of Gregory A. Baer, dated April 2, 2008 ...................................... 164

Statement of Joseph H.H. Weiler, dated April 2, 2008 ................................. 171

Page

VI

Bachus, Hon. Spencer: 

Letter from the National Association of Attorneys General, dated November 30, 2007 ................................................................................................... 181

Davis, Hon. Geoff: 

Letter from the National Thoroughbred Racing Association, dated December 11, 2007 ................................................................................................... 186

King, Hon. Peter T.: 

Statement of Hon. Pete Sessions, dated April 2, 2008 .................................. 188

Letter to Hon. Henry Paulson and Hon. Ben Bernanke, dated December 

12, 2007 .......................................................................................................... 190

Letter to members of the Financial Services Committee from a coalition 

of family and faith-based organizations ...................................................... 194

Meeks, Hon. Gregory W.: 

Responses to questions submitted to the American Bankers Association ... 197

Responses to questions submitted to BITS, the Financial Services Roundtable ............................................................................................................... 203

Responses to questions submitted to the Credit Union National Association ................................................................................................................. 207

Responses to questions submitted to Wells Fargo ......................................... 209

Board of Governors of the Federal Reserve System: 

Responses to questions from Hon. Gregory W. Meeks .................................. 217

Responses to questions from Hon. Donald A. Manzullo ................................ 221

U.S. Department of the Treasury: 

Responses to questions from Hon. Gregory W. Meeks .................................. 222

Responses to questions from Hon. Donald A. Manzullo ................................ 225 

Paul, Hon. Ron: 

Letter to members of the Financial Services Committee from a coalition 

of family and faith-based organizations ...................................................... 226

Letter to members of the Financial Services Committee from major professional sports leagues and the National Collegiate Athletic Association, dated April 2, 2008 ............................................................................... 229

Letter to the Board of Governors of the Federal Reserve System and 

the U.S. Department of the Treasury from major professional sports 

leagues and the National Collegiate Athletic Association, dated December 12, 2007 ................................................................................................... 231

(1)

PROPOSED UIGEA REGULATIONS: 

BURDEN WITHOUT BENEFIT? 

Wednesday, April 2, 2008

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON DOMESTIC AND

INTERNATIONAL MONETARY POLICY, TRADE, AND TECHNOLOGY, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:03 a.m., in room 

2128, Rayburn House Office Building, Hon. Luis V. Gutierrez 

[chairman of the subcommittee] presiding. 

Members present: Representatives Gutierrez, Waters, Sherman, 

Moore of Kansas, Clay, Wexler; Manzullo, Hensarling, McHenry, 

and Marchant. 

Ex officio: Representatives Frank and Bachus. 

Also present: Representatives Murphy, King, and Davis of Kentucky. 

Chairman GUTIERREZ. This hearing of the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology 

will come to order. Good morning and thank you to all of the witnesses for agreeing to appear before the subcommittee today. Today’s hearing will focus on the proposed regulations to implement 

the Unlawful Internet Gambling Enforcement Act of 2006. These 

regulations were published for comment in October of 2007, and 

the comment period closed on December 12, 2007, with over 200 

comments being received. 

For our first panel, we will hear from the issuers of the proposed 

regulation: the Treasury Department and the Federal Reserve 

Board. Our second panel includes representatives from the financial services industry, and I’m betting that we will have a lively debate on this issue. 

We will be limiting opening statements to 10 minutes per side, 

but, without objection, all members’ opening statements will be 

made a part of the record. I yield myself 5 minutes. 

The focus of today’s subcommittee hearing is the proposed regulations to implement the Unlawful Internet Gambling Enforcement 

Act of 2006. The Act prohibits the U.S. payment system from accepting payments or bets or wagers made by U.S. citizens who seek 

to gamble online. The law also requires the Federal Reserve Board 

and the Treasury Department to issue regulations mandating that 

payment systems identify and block all restricted transactions. 

In October of 2007, the draft regulations were issued and more 

than 200 comments were filed in response. As proposed, the regulaVerDate 0ct 09 2002 11:28 Jun 19, 2008 Jkt 042714 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\42714.TXT TERRIE
2

tions would require most companies involved in the payment systems, from banks and credit card companies, to many transmitters 

and payment processors, to develop and implement policies and 

procedures designed to identify and block unlawful Internet gambling transactions. 

The regulations have been widely criticized as being vague and 

costly for financial institutions to implement. One of the most common complaints is that the proposed rules fail to sufficiently define 

key terms, leaving financial institutions with significant compliance difficulties. For example, the regulation fails to adequately define what constitutes ‘‘unlawful Internet gambling’’ or ‘‘restricted 

transaction,’’ yet requires the financial institutions to make a determination on their own about what is lawful or unlawful. If the 

rule is adopted in its current form, the response by many financial 

institutions may likely be to overblock transactions to protect 

themselves from legal liability. Although the regulation does provide a safe harbor for financial institutions that block transactions 

that are in fact legal, it does nothing to ensure that legal transactions are not blocked. As a result, consumers may be placed at 

risk of having lawful transactions blocked. 

It is easy to see how these regulations, if implemented in their 

current form, could wreak havoc on electronic commerce in the 

United States. With that in mind, I want to take a moment to 

question the priorities reflected by the underlying law, which was 

passed while my party was in the minority, and which seeks to 

eliminate Internet gambling by adults. In my opinion, if Congress 

is going to impose additional regulations on financial institutions, 

our time would be better spent restricting payday lending or curbing unfair and deceptive practices associated with credit card accounts and other types of predatory lending. 

But the reality is, we have a law that requires the regulators to 

develop rules that ban Internet gambling, and I have several concerns with the proposed rules. First, I am concerned about the effect these regulations will have on the remittances system that immigrants use to send billions of dollars home each year. Money 

transmitter companies are already having problems maintaining 

accounts with some banks, and I fear that this rule could exacerbate that problem. I am also troubled that these regulations could 

impose significant compliance burdens on financial institutions 

during a time of economic and financial turmoil. 

Finally, I believe it is inappropriate to have financial institutions 

essentially acting as final arbiter in determining which transactions are legal or illegal, especially when the result could be closing a consumer’s account. This hearing will be an opportunity for 

the regulators to address these and other issues concerning the 

proposed rules. We will also have the opportunity to hear directly 

from the financial services industry on the potential cost, regulatory burden, and compliance issues they anticipate if the regulation is implemented as proposed. 

I expect a vigorous debate on the issues, and the subcommittee 

looks forward to working with the regulators as they move through 

the process and decide whether to amend the regulations or simply 

roll the dice and adopt them in their current form. 

3

The Chair will now recognize the ranking member of the full 

committee and the author of the legislation, Mr. Bachus, for 5 minutes. 

Mr. BACHUS. Thank you, Mr. Chairman, for holding this hearing 

on the regulatory implementation of the Unlawful Internet Gambling Enforcement Act. The title of this hearing deals with the regulation proposed by Treasury and the Federal Reserve, although I 

believe also in our minds is Chairman Frank’s legislation, H.R. 

2046, which would effectively repeal the ban on illegal Internet 

gambling that we worked so hard to enact. And I believe it of 

course is also material to today’s hearing. I know several of my colleagues are pushing for the enactment of that legislation if they 

cannot, what I would call, ‘‘water down’’ the regulations which have 

been proposed by Treasury and the Fed. 

I have a letter signed by 45 State attorneys general who oppose 

Chairman Frank’s H.R. 2046 and also oppose any weakening of 

regulations to implement the Unlawful Internet Gambling Enforcement Act. I’m just going to read one quote from a letter that they 

signed. They said: 

‘‘H.R. 2046 effectively nationalizes America’s gambling laws on 

the Internet, harmonizing the law for the benefit of foreign gambling operations that were defying our laws for years, at least until 

the Unlawful Internet Gambling Enforcement Act was enacted. We 

therefore oppose this new proposal and any other proposals that 

hinder the rights of the States to prohibit or regulate gambling by 

their citizens.’’ 

I would like to enter that letter into the record. 

Chairman GUTIERREZ. Without objection, it is so ordered. 

Mr. BACHUS. Thank you. Make no mistake, illegal Internet gambling ruins lives and tears families apart. Study after study has 

shown that gambling, Internet gambling, is a scourge on our society that leads to addiction, bankruptcy, divorce, crime, and moral 

decline. 

Illegal Internet gambling intensifies the devastation wrought by 

gambling by bringing the casino into the home. According to a recent study, 74 percent of those who had used the Internet to gamble have become addicted to gambling, and many of these gambling 

addicts have turned to crime to support their habit. Research also 

indicates that in 2006 alone, nearly 10 percent of college students 

gambled online. 

Indeed, at our committee’s last hearing on this subject, we heard 

testimony from Greg Hogan, whose son was once the president of 

his class at Lehigh University but now sits in a Pennsylvania prison after committing bank robbery in a desperate attempt to erase 

his Internet gambling debts. We also heard testimony from the 

NCAA about several college athletes who had turned to Internet 

gambling after betting on football games, some of which they were 

involved in. 

But the harm that illegal Internet gambling inflicts on our society extends beyond the personal tragedies of the Hogans or other 

American families like them. Illegal Internet gambling also jeopardizes the security of our Nation. The FBI and the Department of 

Justice both testified before this committee that Internet gambling 

serves as a vehicle to launder the proceeds of illegal activities, 

4

helps fund drug trafficking, facilitates tax evasion, and perhaps 

most frightening of all, can be used to finance terrorism. 

To address these harms, this Congress enacted the Unlawful 

Internet Gambling Enforcement Act of 2006. Since its enactment, 

illegal Internet gambling among college-age youth has declined 

from 5.8 percent in 2006 to 1.5 percent in 2007. This is a significant achievement. But any success the Act has had in decreasing 

the rate of illegal Internet gambling would be short-lived if criminals believe that the Act will not be enforced. That is why it is critical that the proposed regulations that are the subject of today’s 

hearing be done right and implemented without further delay. 

In its current form, the regulations that Treasury and the Federal Reserve have proposed require U.S. financial institutions participating in designated payment systems to prevent transactions 

in connection with unlawful Internet gambling. This requirement is 

an essential—could I have unanimous consent to have one more 

minute? 

Chairman GUTIERREZ. Without objection, it is so ordered. 

Mr. BACHUS. Thank you. This requirement is an essential first 

step, but it is worth emphasizing that all forms of payment should 

be covered, because a single exemption leaves the law suspect to 

evasion. The proposed rules provide exemptions for U.S. financial 

institutions that participate in designated payment systems if the 

regulators jointly determine that it is not reasonably practical for 

these firms to prevent illegal transactions. This exemption ensures 

that the financial institutions are not burdened with implementing 

impossible or impractical standards, but the rules should make 

clear that exempted financial institutions that do become aware of 

restricted transactions should be required to block them. 

Thank you again, Mr. Chairman, for holding these hearings and 

for our witnesses. 

Chairman GUTIERREZ. You are very welcome, Mr. Bachus. I recognize the chairman of the full committee, Mr. Barney Frank. 

The CHAIRMAN. Mr. Chairman, the ranking member is correct in 

saying that I opposed this bill and would like to see it repealed—

not the bill, the underlying Act that these regulations implement. 

I think it is an intrusion into personal liberty motivated by the fact 

that a majority of members dislike the purposes to which the liberty is being put. But that does not mean there is no separate issue 

regarding regulation. I would urge Members on all sides to contemplate the arguments that are being made. 

First, as to the attorneys general, let me say that we thought we 

had preserved States’ rights in the bill. We have written to them 

and told them we would be glad, those of us who sponsored the underlying repeal bill, to make clear that the States have that right. 

But beyond that, what they are objecting to is something that I 

thought many members of this committee supported, namely, uniform rules on the Internet. So understand the principle that is involved here and the precedent that is being set, namely, if Members of Congress have a moral objection, we can intrude on the 

freedom of the Internet and we can tell people what they can and 

cannot do on the Internet. 

Now I had previously understood that to be something that 

Members didn’t support, and which States have said, well, we want 

5

to be able to collect sales taxes. I have been all for letting the 

States collect sales taxes through the Internet. I cannot see what 

the intellectual and principal difference is between saying that the 

States are wholly in charge of whether or not individuals choose to 

gamble, but they have no say about whether or not the sales tax 

can be levied. So you are setting the precedent of a federalization 

of the Internet based on the moral views of Members of Congress. 

Now I understand that some people abuse gambling. Some people abuse video games. Some people abuse alcohol. Some people 

abuse a lot of things. The notion that a society prohibits most people from doing something because a small percentage abuse it, I 

had never thought to be the guiding principle. 

But then we get to the question of the regulations, and here the 

argument appears to be that given the importance of the underlying objective, let’s not pay any attention to whether the regulations are burdensome or not. Again, that is not a position that I 

thought many of my conservative friends adhered to. What we are 

being told in effect is, well, forget about whether or not the regulations are burdensome or inefficient. Virtually every sector of the 

economy affected by these regulations has complained about them. 

The Federal Reserve in testimony, and I appreciate their candor, 

says: ‘‘This is a challenging task. The ability of the final rule to 

achieve a substantial further reduction is uncertain. Our objective 

is to craft a rule to implement the Act as effectively as possible in 

a manner that does not have a substantial adverse effect on the efficiency of the nation’s payment system.’’ 

This didn’t come from gamblers. This came from the Federal Reserve. And are we to say that, given the overriding importance of 

the moral objection many Members have to gambling, we will 

therefore go forward with regulations no matter how much they 

might intrude on the efficiency of the system? Well, that is not a 

great precedent to set. It does seem to me that it is important to 

say there is the objective and then there is a separate question as 

to the regulations. 

Now I am of the view, and there are two separate questions here, 

that the manner in which the Congress has chosen to outlaw gambling is the wrong one. That is, we have an objection to gambling, 

and we have enlisted the payment system and the banks of America to be our anti-gambling cops, to the detriment, I believe, of 

their ability to carry on their important financial intermediation 

function. Maybe it was to try and get it into this committee. I know 

the former chairman, the gentleman from Iowa, my predecessor, 

who is ranking member, the gentleman from New York, they really 

didn’t like gambling, and they wanted our committee to be the one 

that drove the stake through its heart. But I think that was an 

error. 

I think it was—and, again, I am not in favor of banning gambling. I did not come here to tell other people what to do with their 

leisure time. But even those of you who do feel confident in your 

ability to supervise the leisure activities of other adults ought to 

find a way to do it directly without drafting the financial system 

of this country and putting it in the service of your moral objections. And I believe that the difficulties we are seeing in enforcing 

the regulation are not due to any shortcomings on the part of those 

6

doing it. I think the Federal Reserve and the Treasury are doing 

their best. We just gave them the wrong job. 

Again, if you want to get rid of gambling, find some other way 

to do it, but don’t impose—and, look, the Federal Reserve is not 

given to hyperbole. When the official statement of the Federal Reserve System is we are trying ‘‘to craft a rule to implement the Act 

as effectively as possible in a manner that does not have a substantial adverse effect on the efficiency of their payment system,’’ that 

means that this could very well be an adverse effect. They don’t 

deal with chimera. 

So what we are apparently being told is, well, a little adverse effect on the payment system is worth it because we will feel so 

much better when we stop people from gambling. I do disagree 

with the underlying objective of the Act. But even those who agree 

with it ought to be willing to say, you know what, let’s find a different way to enforce it. Let’s not burden the important payment 

system by doing it this way. 

Chairman GUTIERREZ. All time has expired on our side. I have 

a list handed to me by the staff of the minority, and without objection, I will follow this: Representative Hensarling of Texas for 2 

minutes; 1 minute to Representative Davis of Kentucky; and I 

would ask for unanimous consent of the members of the subcommittee to allow Representative King 1 minute. Without objection, that— 

The CHAIRMAN. Reserving the right to object, you never know 

when you are going to want something from the Governor of New 

York, so I won’t object. 

[Laughter] 

Mr. BACHUS. You mean if I object, he doesn’t get— 

Chairman GUTIERREZ. That’s true, Mr.— 

Mr. BACHUS. Well, I guess I don’t object. 

Chairman GUTIERREZ. Okay. Representative Hensarling for 2 

minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. I doubt I will need 

the entire 2 minutes. Clearly, many interesting and important 

issues are presented by the Unlawful Internet Gambling Enforcement Act, but I just want to make one brief point. And that is, if 

Congress passes a law that the Federal Government itself finds difficult or impossible to enforce, and turns to private enterprise to essentially enforce that law for them, then we must have clarity in 

our regulatory framework. We need black and we need white; we 

don’t need shades of gray. 

I think that a lot of very important issues have been raised during the comment period on these regulations. And having been a 

small businessperson before I came to Congress and not being able 

in my own small business to afford an army of attorneys, I know 

what happens is, the businesses tend to get risk-adverse. When 

you’re dealing in shades of gray, you get very risk-adverse, and I 

do want to make sure that as Congress tries to single in on one 

type of criminal behavior that lawful commerce is not unduly burdened. I’m not sure that these proposed regulations have met that 

mark, and so I would hope that at the end of the day, we could 

at least have regulatory certainty for all the legitimate businesses 

out there in this space if we’re expecting them to essentially do the 

7

job of law enforcement that the Federal Government finds difficult 

or impossible to do. 

With that, Mr. Chairman, I yield back. 

Chairman GUTIERREZ. The gentlewoman from California, Maxine 

Waters, is recognized for 3 minutes. 

Ms. WATERS. Thank you so much, Mr. Chairman. I’m looking forward to today’s testimony on the proposed regulations to implement a bill that was passed out of both the Financial Services and 

Judiciary Committees last session, the Unlawful Internet Gambling 

Enforcement Act. By addressing only Internet gambling that was 

already unlawful, the legislation passed last session was a bipartisan effort to enhance enforcement by cutting off the flow of revenue to illegal enterprises. The bill prohibited the receipt of checks, 

credit cards charges, electronic funds transfers, or similar transactions by such unlawful businesses. 

I served on this committee and the Judiciary Committee and I 

voted in each committee to report the bill to the House after vigorous and passionate debate. When the measure was considered on 

the Floor as a stand-alone bill, I voted for it. I also voted for it after 

it was added to the Safe Ports Conference Report, which was ultimately signed into law. Now some have noted that the bill passed 

in the dead of night, and it’s true that it was very late at night, 

but the final vote was 409 in favor, and only 2 votes against. 

Today I’m not so sure how I would vote on this bill. I have certainly been challenged by my friend, Barney Frank, and he pushes 

a particular button with me when he talks about legislating morals 

or vices without infringing on fundamental rights. Supporters of 

the bill stressed that the compromise language that emerged from 

the two committees was the product of 10 years of hard work by 

a very unusual alliance of organizations and competing interests, 

from religious organizations like the United Methodist Church, to 

professional sports organizations like the National Football League. 

One of the reasons I am really reconsidering my vote on this legislation is because some of those organizations that are in such 

strong support of the bill are organizations that I have reviewed 

very carefully, and I’m wondering about some of their decisions in 

the way that they manage their own business, and whether or not 

there are some questions of morality in the way that they treat 

some of those in their organization. 

So, again, I’m very seldom in a position where I change my vote, 

but this may be one of those times. But let’s see what today’s testimony will bring. I yield back the balance of my time. 

Chairman GUTIERREZ. I thank the gentlewoman. I recognize Congressman King of New York for 1 minute. 

Mr. KING. Thank you, Mr. Chairman. Thank you for extending 

the courtesy to me to sit here today, and I thank Ranking Member 

Bachus for withdrawing his objection to my appearance. 

Very seriously, like Chairman Frank, I am a co-sponsor of H.R. 

2046, because I believe it has protections built into it which would 

address the concerns that Congressman Bachus has raised, for the 

purpose of today’s hearing is on the regulations. My concern is the 

unintended consequences that can and often do result when we ask 

financial regulators to in effect interpret laws for Congress and enforce morality for Congress. 

8

I think if we’re talking about sports gambling, that’s one thing. 

But to be asking regulators to define what is unlawful conduct, 

what is unlawful gambling, to me really runs a severe risk of going 

too far. And this is an issue I think which brings people from all 

sides together. Just the other day I received a letter—in fact, just 

today, from Grover Norquist, president of Americans for Tax Reform, where he expresses severe concerns about the implications of 

this rule in terms of personal freedom, personal privacy, and regulatory burden on the banking industry and international trade. 

So I think going ahead with these regulations poses real dangers. 

I don’t know why we just don’t confine it to sports gambling and 

leave it at that for now. And I would ask, Mr. Chairman, for unanimous consent to place in the hearing record a statement for the 

hearing by one of our on-leave members of the committee, Representative Sessions from Texas, with a letter from Mr. Sessions 

and other members, the Secretary of the Treasury and Chairman 

of the Federal Reserve. 

Again, I thank you for allowing me to be here today. I’m a member of the full committee but not the subcommittee. I look forward 

to the testimony, and, again, I just want to express my concern 

that these regulations, as they go forward, could really have unintended consequences that all of us would rue in the future, and I 

ask unanimous consent to insert the statement in the record. I 

yield back. 

Chairman GUTIERREZ. Without objection, it is so ordered. Representative Davis of Kentucky for 1 minute. 

Mr. DAVIS. I would like to thank you, Mr. Chairman, for allowing 

me to participate briefly and also Ranking Member Bachus. What 

I would like to do is ask unanimous consent to place in the hearing 

record comments submitted by the National Thoroughbred Racing 

Association, a critical part of the Commonwealth of Kentucky’s 

economy, for some perspective related to the discussions that we 

are going to be having today, and I yield back the balance of my 

time. 

Thank you. 

Chairman GUTIERREZ. We are pleased to have with us on the 

first witness panel representatives from the Board of Governors of 

the Federal Reserve System and the U.S. Treasury Department. 

Testifying on behalf of the Federal Reserve Board is Louise L. 

Roseman. Ms. Roseman is Director of the Board’s Division of Reserve Bank Operations and Payment Systems. Appearing on behalf 

of the Treasury Department is Deputy Assistant Secretary Valerie 

Abend. Ms. Abend is the Deputy Assistant Secretary for Critical Infrastructure Protection and Compliance Policy. 

Director Roseman, you may proceed. 

STATEMENT OF LOUISE L. ROSEMAN, DIRECTOR, DIVISION OF 

RESERVE BANK OPERATIONS AND PAYMENT SYSTEMS, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Ms. ROSEMAN. Chairman Frank, Chairman Gutierrez, Ranking 

Member Bachus, and members of the subcommittee, I am pleased 

to appear before you today to discuss our efforts to implement the 

Unlawful Internet Gambling Enforcement Act. 

9

As you are aware, the Act requires designated payment systems 

to establish reasonable policies and procedures to prevent transactions to fund unlawful Internet gambling activity. Congress recognized, however, that it may be difficult for certain payment systems to prevent restricted transactions and required the agencies 

to exempt payment systems from the rule’s requirements if it was 

not reasonably practical for them to comply. 

The commenters to the proposed rule highlighted a number of 

the limitations in using the payment system to combat unlawful 

Internet gambling activity. The most prominent concern, as was 

discussed here this morning, was the lack of clarity as to what 

forms of Internet gambling are unlawful, and therefore what payments need to be blocked. The proposed rule, like the Act itself, 

doesn’t spell out which gambling activities are unlawful, but rather 

relies on the underlying substantive Federal and State laws. Unfortunately, the activities permissible under these laws are not well 

settled, and they are subject to varying interpretations. 

Congress itself recognized this fact when it excluded from the 

definition of unlawful Internet gambling activity allowed under the 

Interstate Horse Racing Act, but included a sense of Congress that 

the horse racing exclusion is not intended to resolve any existing 

disagreements over how to interpret the relationship between the 

Interstate Horse Racing Act and other Federal statutes. Commenters stressed that uncertainty such as this would make compliance with the rule very difficult. We are considering modifications 

to the rule that would provide greater certainty to payment system 

participants, but our ability to provide complete certainty is limited 

given the ambiguities of the underlying statutes. 

The second challenge, as our proposed rule acknowledged, is that 

most payment systems don’t have the functional capability to identify and block payments made for specific purposes or initiated in 

specific ways, such as over the Internet. In our view, the institution 

that has the customer relationship with the Internet gambling 

business is in the best position to determine the nature of that customer’s business and whether the customer is likely to receive restricted transactions for credit to its account. Therefore, with respect to domestic transactions, the proposed rule exempted all participants in the check, ACH, and wire transfer systems except for 

the participant that has that customer relationship. 

Bank commenters generally indicated that they could perform 

due diligence on their business accountholders at the time of account opening, assuming they could readily determine which forms 

of Internet gambling activity are unlawful. Large banks in particular believed that it would be quite burdensome, however, to determine which of their many existing business customers engage in 

Internet gambling because they have not retained records in a 

manner to enable them to identify customers by line of business. 

We recognize, however, that most Internet gambling businesses 

are based outside the United States and generally have offshore 

banking relationships. This poses additional practical limitation on 

the ability of the U.S. payment system to block restricted transactions, particularly if made by check, ACH, or wire transfer. In 

such cases, we proposed placing the compliance responsibility on 

10

the U.S. payment system participants that send transactions to or 

receive transactions from foreign institutions. 

Commenters stated that measures U.S. banks could take to prevent foreign banks from sending restricted transactions would likely be unworkable. Foreign banks generally have legal obligations in 

their own countries to prevent financial crimes such as money 

laundering or terrorist financing. However, foreign banks have little incentive to identify or prevent Internet gambling activity, 

which is generally permissible outside the United States. There 

may be few options for dealing with restricted transactions through 

international banking relationships without significantly disrupting 

cross-border payment flows. 

In closing, I would like to note that funding unlawful Internet 

gambling activity through the U.S. payment system has become 

more difficult in recent years, due in large part to steps card 

issuers and money transmitters have already taken on their own 

initiative to prevent these transactions. The extent to which the 

final rule can substantially further restrict the use of the U.S. payment system for unlawful Internet gambling is uncertain. 

Together with the Treasury, we are carefully considering all comments received and assessing what changes we should make to the 

rule to implement the Act as effectively as possible without having 

a substantial adverse effect on the Nation’s payment system. 

I would welcome any questions you may have. 

Thank you. 

[The prepared statement of Ms. Roseman can be found on page 

95 of the appendix.] 

Chairman GUTIERREZ. I thank you very much. 

Ms. Abend, please. 

STATEMENT OF VALERIE ABEND, DEPUTY ASSISTANT SECRETARY FOR CRITICAL INFRASTRUCTURE PROTECTION 

AND COMPLIANCE POLICY, U.S. DEPARTMENT OF THE 

TREASURY 

Ms. ABEND. Chairman Frank, Chairman Gutierrez, Ranking 

Member Bachus, and members of the subcommittee, it is my privilege to appear before you today to discuss the Unlawful Internet 

Gambling Enforcement Act of 2006. 

The Act was fashioned to require payment systems to interdict 

the flow of funds from gamblers to businesses providing unlawful 

Internet gambling services. To accomplish this, the Act requires the 

Treasury Department and the Federal Reserve Board, in consultation with the Justice Department, to jointly prescribe regulations 

requiring participants in designated payment systems to establish 

policies and procedures that are reasonably designed to prevent or 

prohibit such funding flows. It also requires that payment systems 

or portions of payment systems be exempted in situations in which 

it would not be reasonably practical for payment systems to prevent or prohibit unlawful Internet gambling transactions. 

On October 4, 2007, the Treasury Department and the Federal 

Reserve Board, after consultation with the Justice Department, 

published a Notice of Proposed Rulemaking seeking public comment. Our goal when writing this proposed rule was to faithfully 

11

adhere to the mandate set forth by Congress in the Act. The comment period closed December 12, 2007. 

We received more than 200 comments from a diverse group of interests, including entities potentially subject to the proposed regulations, individuals and groups supportive of Internet gambling, individuals and groups opposed to Internet gambling, and others. 

We are currently reviewing each comment closely, and analyzing 

the issues presented. Many comments present more than a single 

issue, and certain issues require additional research. 

Some of the comments address the meaning of statutory definitions provided by Congress, the applicability requirements to portions of designated payment systems, and the impacts this proposed regulation could have in the event it were to be finalized as 

proposed. 

Crafting such a joint rulemaking requires extensive coordination. 

We have been impressed with the quality of the comments provided 

and with the effort and expertise employed in the development of 

many of those comments. 

An overarching goal for our efforts has been to closely adhere to 

the statutory instructions provided to us by Congress. The Act requires designation of payment systems that could be used in connection with unlawful Internet gambling. Such a designation 

makes the payment system and financial providers participating in 

the system subject to the requirements of the regulations. The proposed rule designated the following five payment systems: 

(1) Automated Clearing House Systems; 

(2) Card Systems; 

(3) Check Collection Systems; 

(4) Money Transmitting Businesses; and 

(5) Wire transfer Systems. 

The proposed rule partially exempts certain participants within 

some of the designated payment systems from having to establish 

reasonably designed policies and procedures. The Treasury and the 

Federal Reserve Board determined that this was the most appropriate way to implement the Act while retaining fidelity to the intent of Congress. 

Under the proposed rule, the gambling business’s bank would not 

be exempted because it could, through reasonable due diligence, ascertain the nature of its customer’s business and ensure that the 

customer relationship is not used to receive unlawful Internet gambling transactions. The proposed exemptions generally extend to 

the gambler’s bank. 

The Act further requires providing nonexclusive examples of policies and procedures which would be deemed reasonably designed to 

prevent or prohibit unlawful Internet gambling transactions. As a 

result, this proposed rule contains a safe harbor provision as mandated by the Act that includes for each designated payment system 

nonexclusive examples of reasonably designed policies and procedures. 

The Treasury, working closely and collaboratively with our colleagues at the Federal Reserve Board, is making progress in reaching our statutory mandate to promulgate a final rule that strictly 

adheres to the Act. No final decisions have been made regarding 

any aspect of the final rule or the comments provided, and we are 

12

still considering all aspects of the proposed rule. When we publish 

a final rule, we will of course provide analysis of the comments received and the reasons for any decisions. We are committed to giving fair consideration to all relevant comments as we are working 

toward promulgation of a final rule. We have benefitted from the 

knowledge and the efforts of our colleagues at the Federal Reserve 

Board and the Justice Department as we have proceeded in our 

consideration and analysis. 

Thank you, and I would be happy to answer any of your questions. 

[The prepared statement of Ms. Abend can be found on page 43 

of the appendix.] 

Chairman GUTIERREZ. Thank you, Ms. Abend. I would like to ask 

unanimous consent that the following items be inserted into the 

record: the statement from Professor H.H. Weiler, NYU Law 

School; a letter from Jim Tozzi, Center for Regulatory Effectiveness; a statement from Marsha Sullivan, Consumer Bankers Association; a letter from Chamber of Commerce; a letter from Americans for Tax Reform; a Comment Letter, Office of Advocacy, Small 

Business Administration; a statement from Rick Smith, the UC 

Group; the NAFCU letter; and the Bank of America statement of 

Gregory Baer. 

Without objection, it is so ordered. 

I thank the witnesses. First, I would like to ask the Federal Reserve Board, the proposed regulations refer to various actions that 

must be taken when a covered payment system ‘‘becomes aware’’ 

that a customer is engaging in restricted transactions. 

Numerous commenters raised concerns with this standard, and 

how difficult it would be to apply. What exactly does the term ‘‘becomes aware’’ in the proposed regulations mean? 

Ms. ROSEMAN. Well, that is something, as you mentioned, that 

we did get a number of comments on. Commenters said that it 

would be clearer if the regulation had a standard such as having 

actual knowledge rather than ‘‘becomes aware,’’ because of the ambiguity on how to apply that other standard. It is something that 

we are looking at as we develop the final regulation. 

You had indicated that if an institution ‘‘becomes aware’’ there 

are certain required actions they must take. The proposed regulation provided examples of different actions that could be taken, but 

we said explicitly that these are examples of reasonable policies 

and procedures, but payment system participants would be able to 

develop alternate policies and procedures that may also be deemed 

reasonable. 

Chairman GUTIERREZ. Let me ask Ms. Abend, the proposed regulations require that when the payment system, again, becomes 

aware that the customers receive restricted transactions, it must 

take certain actions which may include closing the customer’s account or severing the relationship with the customer. There is no 

further guidance on how many transactions it would take for such 

drastic action to occur. But as drafted, it appears that it could be 

as little as two. Are there size or volume thresholds for severing 

a relationship with a customer? If an account is closed, must it remained closed? How will disputes be resolved if there is a question 

as to the legality of the transaction or the action of the agency? 

13

Ms. ABEND. Well, Mr. Chairman, I would echo what my colleague 

from the Federal Board has said, which is, first and foremost, we 

did receive these comments about what does ‘‘become aware’’ mean 

and how should we develop a standard, if any, that would apply 

to ‘‘becomes aware.’’ We’re still considering what to do with respect 

to that comment. 

We have not come to any sort of final determination of whether 

that is a volume-driven type of transaction or if someone were to 

come and notify them if that would by law enforcement or a Federal financial regulator. And so I think we’re still taking it under 

consideration about how we would answer that comment. 

Chairman GUTIERREZ. Well, it just appears to me that since several months have passed and each of you and the group—I mean, 

both the Federal Reserve and Treasury, have excellent people 

working there, that we would tread carefully as we pursue these 

issues, because many people made the comment, as both of you responded. And it seems to me to be a valid area. Just what is it you 

are going to do, and the degree of certainty with which you act and 

which banks and financial institutions act are going to be critical 

to not somehow violating the rights of others as we try to police 

gambling in America. 

I have actually not an underlying problem with trying to do it, 

although it is always difficult when you buy lottery tickets, and 

since I am getting to be 54 years old, I get all these prospectus all 

the time and they all tell me, be cautious. You have a lot of risk. 

So I’m getting these prospectus all the time from mutual funds and 

for stocks and bonds. And I think they’re asking me to gamble each 

and every time, because they’re certainly—because of the Federal 

Government and regulations we have taken, there are many warnings. And so if because of those warnings, I don’t do it. I don’t know 

if we can do the same thing with a lotto ticket or somebody betting 

on their favorite college team. 

So, I would just say we look forward to having you back as the 

regulations become more finalized and formalized, because I think 

it’s going to be very, very critical that we make sure that we do 

it in a very careful minded way. 

Before I go to Mr. Bachus, I’m going to ask unanimous consent 

that Mr. Davis, who has already participated, be allowed to ask 

questions. And now I have the list from the minority, beginning 

with Mr. Bachus. You are recognized for 5 minutes. 

Mr. BACHUS. Thank you. I appreciate our witnesses testifying. I 

would like to hand you at this time a letter from the NFL, Major 

League Baseball, the NBA, the National Hockey League, and the 

NCAA. And this letter, I think you have had for about 9 months. 

Have you gone over this letter pretty carefully? 

Ms. ROSEMAN. Yes. We have been looking at all the comments we 

have received. They have raised issues on many aspects of the regulation. The payment system, frankly, isn’t well designed to be able 

to identify unlawful Internet gambling activity. And that is posing 

a number of challenges to us, along with the uncertainty with respect to what forms of Internet gambling should be proscribed by 

the regulation. 

14

Mr. BACHUS. You know, they point out some interesting things; 

they are telling us that, for instance, you all say you can assemble 

a list of bad actors, and that is impractical. Is that— 

Ms. ROSEMAN. In the proposed regulation, we didn’t explicitly 

propose a list, but in the supplementary information accompanying 

the proposed rule, we did discuss the pros and cons of having such 

a list, talking about the challenges of developing a list, and we 

asked commenters a number of questions with respect to the desirability of having such a list in the final rule. 

Mr. BACHUS. You know, all of these lists would be of illegal gambling operations, many of them offshore. What struck me is that 

our staff did just a cursory study where in at least 5, but I think 

as many as 17 cases, you have done that. I guess the more recent 

are the cross-border flow of monetary instruments, legislation on 

that. You didn’t have a problem with that. The currency transaction reporting requirements, you assembled it for that. The Bank 

Secrecy Act, you do it under that. Anti-money laundering statutes, 

you do it under that. You do it under the terrorist financing, and 

there is not a problem there. 

Also, you said that it is not practical for ACH, wire transfer, and 

check system participants to block restricted transactions except 

for those by entities that either have a direct relationship with the 

Internet gambling site or certain international payments. But in 

fact, in all these statutes, and in about 12 others, you do that. Do 

you see what I’m saying? So, I mean, I’m somewhat mystified as 

to why—do you understand what I’m saying? I’m just saying that 

you all do it. There are so many cases where you require an institution to do it. They do it. They said they—in fact, and another 

thing, Representative Paul Gillmor is dead now, but he pointed out 

that the small banks said they could do this but some of our largest, most sophisticated financial institutions said they couldn’t. 

That strikes me as incredibly odd. I’m sorry. 

Ms. ROSEMAN. In looking at the list idea, many commenters used 

as analogy the OFAC list. I think the one thing that really distinguishes the list here from the OFAC list is that OFAC lists particular entities with whom you shouldn’t have transactions. In this 

case— 

Mr. BACHUS. And the NCAA has identified 900 of those. 

Ms. ROSEMAN. Yes. But in this case, it is restricted activity, not 

restricted parties. So even gambling operations may have a combination of payment transactions that would be restricted under 

this law and others that would not be. 

Mr. BACHUS. All right. Let me dispute that. We are talking about 

illegal Internet gambling enterprises that are not licensed to do 

business in the United States. Now how could they possibly—they 

are illegal. They are criminal enterprises. They are not authorized 

to do business in the United States or transact business. 

Ms. ROSEMAN. The companies that have these businesses may 

also have other commercial transactions that they conduct that 

would be totally unrelated to gambling. 

Mr. BACHUS. Well, I understand that, but— 

Chairman GUTIERREZ. The gentleman’s time has expired. 

Mr. BACHUS. But if they are doing an illegal enterprise, you—

and other enterprises if they are doing something illegal, they may 

15

do something legal, but you block them in all these other statutes, 

because—in fact, you block them because they do that. 

Chairman GUTIERREZ. Ms. Roseman, please answer the gentleman’s question, and then we will proceed. 

Ms. ROSEMAN. Bottom line, we did get a lot of comments about 

the list. It is something that we are looking at as we develop the 

final rule. As Ms. Abend mentioned, we haven’t come to any final 

decisions, but we certainly understand the interests of both the financial industry and of the professional sports leagues, to have certainty with respect to what is lawful and what is unlawful. 

Mr. BACHUS. Yes. And I— 

Ms. ROSEMAN. But we understand the objective. 

Mr. BACHUS. I guess my point is, saying that you can’t do something you’re doing in 17 other statutes is sort of unusual. 

Chairman GUTIERREZ. The gentleman’s time has expired. Chairman Frank. 

The CHAIRMAN. Well, to begin, we are prepared in the language 

to exempt the sports leagues. We already allow them to. But as I 

understand it, what they are apparently telling you is that they, 

as I read their letter, that the gentleman—they want these regulations as proposed adopted, and what they are saying is, because 

there might be some problem with their business, even though they 

could be exempted, they are insisting that regulations be adopted 

that all of those on whom they would fall would find very burdensome. Their total lack of concern for the payment system, for the 

legitimate arguments raised by the others, is troubling. 

But I’m particularly intrigued by the question of horse racing. 

And I admit that I am not a Biblical scholar, and I often am unable 

to follow some of the distinctions that Biblical scholars make. The 

one I have been struggling with is in all of the moral teachings 

about gambling—you know, I have this problem with regard, for instance, to conservative economics, free market, free enterprise—I 

have not yet found the footnote that says except agriculture, that 

many of my conservative colleagues believe deeply. 

Similarly, I can’t find the exemption for horse racing in all of the 

anti-gambling morality, or in the statistics on people being addicted. But as I understand it, we did get a letter from the gentleman from Kentucky urging that you make clear that we are exempting horse racing, and I thought betting on a horse was gambling. Apparently, betting on a horse is not gambling. Perhaps it 

is animal husbandry, I don’t know. 

But let me ask you, because one of the problems we have is uncertainty. And there is really a rather extraordinary provision in 

this law that says nothing in this bill—this is the underlying law 

the gentleman from Alabama sponsored—there is a provision that 

says nothing in this law will resolve the uncertainty as to whether 

or not it covers horse racing. Really, a rather bizarre piece of legislation. Congress says Congress cannot make up its mind about the 

conflict. But let me ask you, with regard to people who gamble 

through the Internet on horse racing, in States where that is not 

legal, is that banned or not banned, according to the regulation? 

Let me ask each of you. 

16

Ms. ROSEMAN. Well, in our consultations with the Department of 

Justice, their belief is that it is illegal in all States irrespective of 

whether the individual State has banned it or not. 

The CHAIRMAN. But does the regulation say that? 

Ms. ROSEMAN. The proposed regulation did not say that because 

we did not go down the road of trying to resolve the— 

The CHAIRMAN. Well, say I’m a bank, and I get this processing 

request for someone who made a bet on a horse race. Do I accept 

it or do I reject it? According to the regulation. 

Ms. ROSEMAN. That was the biggest comment we received. 

The CHAIRMAN. Well, I understand that, but I didn’t ask you how 

many comments you received. What do I do? I’m a nice little bank 

here, and I don’t want to, you know, I say, well, look, I—you know, 

who am I to counteract the great morality of that wonderful Congress that tells everybody how to live a good life? And how do I 

interfere? So now somebody wants to make a bet on a horse. Do 

I allow that bet to be paid, or do I not? You have made the regulations. 

Mr. BACHUS. I would allow you to do it. 

The CHAIRMAN. Well, I didn’t yield. 

Mr. BACHUS. I would let you bet. 

The CHAIRMAN. I didn’t yield to the gentleman, and if the gentleman wants to make a clarification, he ought to do it in the law, 

this law that he helped to pass, that says we don’t know. I guess 

they’re against gambling except that the bank has to gamble. But 

I do want to ask the question. Under the regulations as proposed—

they may be amended—I am a financial institution. Do I or do I 

not process that payment for a bet on a horse? 

Ms. ROSEMAN. I would assume that most institutions would not 

process— 

The CHAIRMAN. No, no. I’m not asking you to assume what they 

would do. You’re the regulator. And I understand you didn’t write 

this silly business, and don’t take it personally, but you have this 

responsibility. When the lawyer calls you and says, okay, counsel 

to the Fed, counsel to the Treasury, I have a very law-abiding client here. What should she do? Should she process this payment? 

Or if she processes the payment, is she violating the law? What is 

the answer? 

Ms. ROSEMAN. Unfortunately, the proposed regulation was silent 

on that issue, and I think that is something we are going to need 

to look at for the final regulation. 

The CHAIRMAN. So the answer is to gamble on it? 

Ms. ROSEMAN. That is essentially what— 

The CHAIRMAN. And our friends at the NFL and the AFL, etc., 

have said—no, the NFL and the major leagues—you go ahead and 

do it. So we are telling the entire payments—the entire financial 

structure of America that whether or not—and I would guess that 

betting on horses is a substantial part of gambling—I think that 

is the greatest abdication of responsibility that I can think of for 

Congress to foist that set of choices and ambiguities on the system. 

Thank you, Mr. Chairman. 

Chairman GUTIERREZ. Thank you. Mr. Marchant is recognized 

for 5 minutes. 

17

Mr. MARCHANT. Thank you, Mr. Chairman. Ms. Roseman, I have 

heard you say that these are not the final rules and that all of the 

comments will be taken into consideration. Will the final rule define unlawful Internet gambling? 

Ms. ROSEMAN. I can’t say at this point exactly what is going to 

be in the final rule. The challenge we have is interpreting something—particularly Federal laws where Congress itself isn’t sure 

what they mean, and then trying to figure out ourselves how to interpret them. That is something we are really struggling with at 

the moment. 

Mr. MARCHANT. Is it your feeling that Federal law is clear on 

what unlawful Internet gambling is? 

Ms. ROSEMAN. No, I don’t think it is. I think that there are different Federal laws that interact with each other, and that is creating the challenge. 

Mr. MARCHANT. But there are—States are more clear on their 

laws as far as what— 

Ms. ROSEMAN. States with respect to truly intrastate activity. 

What we’re talking about with the horse racing would be interstate. 

Mr. MARCHANT. If the regulators cannot, and it doesn’t sound 

like they’re optimistic that they can define what unlawful Internet 

gambling is, how will my bank in my hometown know what it is 

when they see that transaction? 

Ms. ROSEMAN. I suspect that they would take a conservative approach and assume that all Internet gambling is unlawful. 

Mr. MARCHANT. What if the transaction is wrapped in the appearance of another type of transaction? What if you are placing 

your bet at Joe’s T-Shirt Shop in the invoice and all the transaction 

reflects is a purchase and a transaction with Joe’s T-Shirt Shop? 

Ms. ROSEMAN. In that case, payment system participants would 

have no way of knowing that the transaction actually related to unlawful Internet gambling and would likely process the transaction. 

Mr. MARCHANT. And there would be no penalty in that instance 

for that financial institution? 

Ms. ROSEMAN. I would think not. They would have no way to 

have flagged that transaction as having been unlawful. 

Mr. MARCHANT. So isn’t it likely that in response to—and I 

would like for you to contemplate this in the final rules—isn’t it 

likely that as nimble as the Internet is, and as resourceful as the 

Internet gambling industry is, that they will adopt a mechanism to 

make no transaction appear to look like an Internet gambling 

transaction? 

Ms. ROSEMAN. I think there is this risk, depending on how the 

rule works. In the proposed rule, there was some responsibility 

placed on the bank that held that company’s banking relationship. 

So if the bank that had the business relationship with Joe’s T-Shirt 

Shop started seeing a pattern of transactions that seem unusual for 

that business, it may want to probe further about what is happening. Or if a bank that signed that business up accepts credit 

cards, and it used a regular retailer merchant category code rather 

than the gambling merchant category code, if the bank was aware 

of what the true activity was, it would have a responsibility to do 

something about it. 

18

Mr. MARCHANT. Yes. I just, a month or so ago, had my credit 

card number used, and I discovered within about 30 days that 

there are hundreds of different mechanisms and false companies 

and companies that sell no products, companies that have nothing—no purpose whatsoever except to process stolen credit card 

numbers through, and of course my credit card company was very 

good about being able to recognize that after the fact. But it was 

from me prompting them and calling them and saying, you know, 

I don’t buy—I really didn’t buy anything at Bloomin’ Candles in 

Minnesota. But if you don’t have the proactivity on the part of the 

customer and you are solely dealing with the Internet provider, of 

the Internet, then I would like for you to contemplate this part of 

it in your final rules. 

Chairman GUTIERREZ. The gentleman’s time has expired. Mr. 

Clay is recognized for 5 minutes. 

Mr. CLAY. Thank you, Mr. Chairman. Let me start with Ms. 

Abend. The Administration and some of my colleagues have been 

adamant that we cannot overburden the banking sector with laws 

and regulations governing community lending, governing unscrupulous lending practices and other policies designed to help and protect people. Does it not seem incongruous that against the backdrop of the subprime crisis and all of the other challenges faced by 

the banking industry that we would impose this additional burden 

on the banks? 

Ms. ABEND. Well, Congressman, you know, certainly the current 

market conditions are the number one priority facing the Secretary 

and certainly is where our attention is being spent, but with regard 

to this particular proposed rule, we are carrying forth, as we are 

required by statute, to implement proposed regulations and ultimately a final regulation adhering very closely to the statute that 

was provided to us. So we’re just following what we had to do as 

required by mandate. 

Mr. CLAY. Well, let me ask you, how realistic is it that authorities can actually police Internet gambling, that they can actually 

enforce this law, that they could stop the scourge of Internet gambling? How realistic that we are going to be effective in that process of stopping Internet gambling? 

Ms. ABEND. Well, I think we certainly proposed a rule that we 

thought very much adhered to what the sense and the intent of 

Congress was to try and stop the illegal activity and the illegal 

transactions. I’m sure that there’s no regulation today on anything 

that is 100 percent possible at blocking all of the illegal activity, 

but it is, we hope, our final rule will be a strong deterrent. 

Mr. CLAY. Well, but I can see us getting into a lot of discretionary decisions, a lot of judgment calls on the part of the regulators and the banks, especially when you look at this confusing 

chapter in the law about horse racing. I’m not even sure does it exempt horse racing, does it not? 

And then we have requests from the major sports leagues who 

also want to be exempted, but they didn’t include the fact that they 

are already conducting gambling over the Internet through 

Sportsbooks, through Las Vegas casinos and others. Sportsbooks 

take bets on all kinds of professional games, and college games. So 

how do we—how will we separate this and actually enforce it? 

19

Ms. ABEND. Well, Congressman, I think as you have heard from 

my colleague from the Federal Reserve Board, this issue of clarity, 

which we received so many comments about on all sides of the 

issue, some proposing that we clarify what is legal or illegal gambling, others proposing if we produced a list, that is something that 

we, as my colleague, Louise, has said, from the Federal Reserve 

Board, are struggling with and trying to figure out what if anything we can do. 

I certainly would also mention that in our consideration, we are, 

as required by the statute, consulting with the Department of Justice, who truly are, from a Federal standpoint, more of the experts 

when it comes to the statutory Federal definitions of legal and illegal gambling. 

Mr. CLAY. Okay. Ms. Roseman, any comments on how we can effectively enforce the statute? 

Ms. ROSEMAN. I think it is going to be very difficult to enforce. 

The implementing regulations will not be ironclad. It will be very 

difficult to totally shut off the payment system for use in unlawful 

Internet gambling. As was mentioned earlier, companies could disguise the purpose of the transaction. In many payment systems, 

the purpose isn’t even included in the payment that flows through 

the financial industry to begin with. 

Mr. CLAY. So the law doesn’t have teeth to begin with. It’s just 

a statement, more of a statement from this body than anything 

else? 

Ms. ROSEMAN. I think the law is relying on the payment system— 

Mr. CLAY. I’m going to stop you there and yield the rest of my 

time— 

The CHAIRMAN. Let me just ask, on the—if I could briefly, on the 

question of confusing. I have been informed that the 5th Circuit in 

2002 ruled that horse race gambling was legal. So in the interpretation, would it make any difference if I were a bank in the 5th 

Circuit or elsewhere? Now I know the Justice Department doesn’t 

agree with the Fifth Circuit. 

Mr. BACHUS. Point of order. 

Chairman GUTIERREZ. The gentleman will state his point of 

order. 

Mr. BACHUS. I have no problem with the chairman asking this 

question, but I would also ask for equal time. 

The CHAIRMAN. Well, that wouldn’t be a point of order, I guess. 

The gentleman didn’t object to my asking the question as long as 

he didn’t think it was a tough question, so I’ll withdraw it and ask 

it later. 

Chairman GUTIERREZ. Mr. King, you are recognized for 5 minutes. 

Mr. KING. Thank you, Mr. Chairman. Thirty years ago I was general counsel to a government-run off-track betting corporation in 

New York, and we were going through a number of similar legal 

issues. That was 30 years ago. I don’t know how much progress we 

have made since then as to what can be done and not done, but 

let me just follow up on what Congressman Clay said. And I’m not 

trying to really be trivial in saying this, but with everything facing 

Chairman Bernanke and Secretary Paulson and revamping the regVerDate 0ct 09 2002 11:28 Jun 19, 2008 Jkt 042714 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\42714.TXT TERRIE
20

ulatory structure in a way that it hasn’t been done in over 70 

years, to be putting this much effort into something which even the 

greatest minds in Congress cannot define when it comes to illegal 

gambling, I wish you well on that. 

But very seriously, I think your testimony, and I really appreciate your testimony, and I appreciate your honesty on it, and the 

questions that are coming show to me either the impossibility of 

coming up with adequate regulations or meaningful regulations 

based on the legislation, or coming up with regulations which could 

have the most dire unintended consequences with severe impact on 

the financial services industry. 

I would just propose, and I’m probably not going to use all my 

5 minutes, but since there does seem to be a consensus, including 

from sports itself, would it make sense to go ahead with regulations dealing with sports and then either put the other aside or 

allow an administrative law judge to look at it, but at least go 

ahead with the regulations as it applies to professional and intercollegiate sports? 

Ms. ROSEMAN. The challenge is many Internet gambling Web 

sites, I believe, have a combination of sports gambling and other 

types of gambling done by the same company. So, again, by the 

time the transaction gets into the payment system, it would be 

very difficult for the financial industry to know what type of gambling the payment related to. 

Mr. KING. Okay. I don’t have the same ability as the chairman 

of the committee to express outraged hyperbole, but if even on 

something which everyone agrees is illegal and everyone agrees 

should be controlled, and if that can’t be done, doesn’t that just 

show almost the impossibility of coming up with regulations that 

would cover an area which no one has been able to fully define? 

Ms. ROSEMAN. It does point out that problem. If Congress were 

to say that any transaction involving a company that had sports 

betting would be prohibited, that would be somewhat different than 

prohibiting just the sports betting itself, because the financial industry wouldn’t be able to determine the purpose of variuos transactions involving that company. 

Mr. KING. I see. Ms. Abend, do you have any comments? 

Ms. ABEND. I just concur with what my colleague from the Federal Reserve Board has said, that it is difficult to separate out the 

differences between, you know, whether it is a sports transaction 

or some other type of transaction. And, obviously, we have to adhere to what Congress gave to us. So we’re just following exactly 

what we were provided, and there is no provision there really to 

do with that. 

Mr. KING. Okay. Thank you. I yield back. 

The CHAIRMAN. Will the gentleman yield to me for one—just 

briefly? 

Mr. KING. If it’s appropriate, I would yield. 

The CHAIRMAN. Yes. I just—let me say, I had one question based 

on the line of questioning from my colleague from Texas, Mr. 

Marchant. You mentioned that there might be a disguise, they 

might say Joe’s T-Shirt Shop, etc. There are penalties for the financial institutions here. Under the regulations, would a financial inVerDate 0ct 09 2002 11:28 Jun 19, 2008 Jkt 042714 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 K:\DOCS\42714.TXT TERRIE
21

stitution be under any affirmative obligation to uncover a pattern 

that might suggest fraud? 

Ms. ROSEMAN. Under the proposed regulations, we said that the 

banks that had the customer relationships with the business customers would have to do due diligence to ensure that those customers were not conducting restricted transactions through their 

bank. If the pattern of transactions was something that would not 

look anomalous to their cover activity, I’m not sure if that is something that the bank would necessarily find. 

The CHAIRMAN. Okay. But it’s important for you not to simply be 

not sure. We need to know. 

Mr. BACHUS. Mr. Chairman, could I respond? 

Chairman GUTIERREZ. Excuse me. The gentleman— 

Mr. KING. If I have any time left, I yield it to the gentleman from 

Alabama. 

Chairman GUTIERREZ. The gentleman, Mr. King, yields to the 

gentleman from Alabama. 

Mr. BACHUS. Thank you. I think a lot of the questions that have 

been posed would be better answered by the Justice Department. 

In fact, Ms. Abend, you said I think on two responses that the Justice Department would be better able to answer those questions. 

And for the record, before we adjourn this panel, I would like to 

point out that a number of the questions could have been answered 

by the Justice Department and they would have been the appropriate party. And for that reason, I, on at least three different occasions, strongly urged and requested the committee to invite the 

Justice Department, but that request was not honored. 

Chairman GUTIERREZ. The recommendation of the gentleman 

will be seriously considered after today’s hearing. I assure him of 

that. 

Mr. BACHUS. Thank you. 

Chairman GUTIERREZ. Mr. Wexler is recognized for 5 minutes. 

Mr. WEXLER. Thank you, Mr. Chairman. I want to follow Chairman Frank’s line of questioning and Mr. Clay’s line of questioning. 

Unfortunately—you’re right. You didn’t pass this awful law, but 

you’re assigned the responsibility of preparing the regulations. The 

only appropriate response in my view to what we’re hearing this 

morning is to undo the Unlawful Internet Gambling Enforcement 

Act in its entirety, and if there are industries that wish to be regulated, whether it’s sport industries or whatever, then engage in a 

consensus. But the idea that we are now taking this law that violates our privacy, invades our freedom, and now applying on top of 

that a set of regulations that are inconsistent at best and then ask 

banks to enforce this inconsistency, just exacerbates the situation. 

But let me follow what Chairman Frank was beginning to get at, 

because one of my concerns is the idea that law abiding adults who 

compete against each other in games based on individual skill such 

as poker, why wouldn’t they be—or I would presume they, too, 

should be exempt from these regulations. Isn’t that correct? 

Ms. ROSEMAN. We got a lot of comments from poker players who 

made exactly that argument. The Act’s definition of what is a ‘‘bet 

or wager’’ includes a game subject to chance. There are a number 

of games, such as poker, that involve a great deal of skill but probably are also subject to chance. The Act’s scope includes games subVerDate 0ct 09 2002 11:28 Jun 19, 2008 Jkt 042714 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\42714.TXT TERRIE
22

ject to chance. The Act doesn’t require a predominant element of 

change, but just that the game be subject to chance. 

Mr. WEXLER. Well, let’s say we are in New Hampshire. If I understand the New Hampshire statute, it describes gambling as a 

game of chance where the player cannot affect the outcome. Clearly 

that would not describe poker, as you just described it, and I agree 

with you. If you take the 5th Circuit’s interpretation of the Wire 

Act, then wagering on poker in New Hampshire is clearly legal. So 

let’s say we are playing poker in New Hampshire, we should be exempt, right? 

Ms. ROSEMAN. The Federal Reserve Board is not an expert on 

gambling law. We have in our consultation with the Department of 

Justice asked them this question. They believe poker is unlawful 

under this law. I think that is all I can say. 

Mr. WEXLER. Sure. If I understand it correctly with respect to 

the regulations, is it correct to say that each bank would have to 

establish its own policy on what transactions to block in compliance 

and what to permit? And if they got it wrong, they would be liable? 

Ms. ROSEMAN. They could either adopt their own policies, or they 

can rely on the policies of a designated payment system that they 

participate in. So, for example, if you are a credit card issuer and 

you rely on the policies of Visa or Mastercard to ensure that the 

transactions coming through will have a merchant category code 

that flags this as gambling and will have a code to say that the 

card was not present when the transaction took place, and then 

you took actions based on the card system’s policies and procedures, you wouldn’t then need to go through and develop a— 

Mr. WEXLER. But it certainly— 

Ms. ROSEMAN. —on your own. 

Mr. WEXLER. It is certainly conceivable that different banks or 

different card systems would have entirely different rules for the 

same transactions? 

Ms. ROSEMAN. In card systems, probably unlikely but certainly 

conceivable. 

Mr. WEXLER. Well, Mr. Chairman, if nothing else, I would suggest that this hearing illuminates the fact that what the underlying bill has established is a totally inconsistent system of regulation of law-abiding adults wishing to play games such as poker or 

mahjong or chess. 

If I could ask one other question. In my district, bridge is a big 

game, along with mahjong, along with poker. If a group of 78-yearold men and women get together and want to play bridge and they 

pay an entrance fee of $20 and they register online and they have 

to use their credit card, is that something that now is going to wind 

up being a prohibited activity? 

Ms. ROSEMAN. I would just be speculating at this point, but I’m 

not sure if the gambling itself would be online. It would just be the 

entrance fee, but I had not considered that particular— 

Mr. WEXLER. Right. So the majority—the former majority should 

understand what they did when they passed the Unlawful Internet 

Gaming Enforcement Act is that they made criminals out of lawabiding Americans who play poker, who play chess, who play 

bridge, or who play mahjong. And this is all in the context of a 

23

mortgage crisis and a banking crisis in America. Thank you very 

much, Mr. Chairman. 

Chairman GUTIERREZ. And next we have a member of the subcommittee, Mr. McHenry. 

Mr. MCHENRY. Thank you. I thank the chairman for yielding 

time. You know, looking at the law and listening to your testimony, 

both from my office and then here this morning, I do have just a 

broader question for both of you. Is it the construct of the legislation that is the issue on issuing regulations and enforcement? Or 

is it the intent of the legislation? Are you saying in terms of your 

regulatory capabilities that even the intent of this bill, which is to 

root out, you know, unlawful forms of gambling, is that possible, 

in your regulatory view? Or is it simply the construct of this legislation? 

Ms. ROSEMAN. I think the challenge is a combination of both 

things that you mention. Part of it is the construct of the legislation itself that leaves this ambiguity as to what forms of Internet 

gambling are lawful and which are unlawful. Part of it, though, is 

the overall intent by having the payment system be the mechanism 

to combat this unlawful Internet gambling. And as I mentioned 

earlier, the payment system isn’t well designed for this task, and 

that’s really what we’re struggling with. 

Ms. ABEND. I would agree with my colleague from the Federal 

Reserve Board that these are incredibly complex issues, and so the 

statute definition which we took whole into our proposed regulation 

creates this problem where we—there is this ambiguity that we 

have seen reflected in the comments that we were provided. And, 

far be it for me to speculate on the intent of Members of Congress. 

Mr. MCHENRY. Okay. All right. Fair enough. That was a very 

simple answer. I think, Ms. Roseman, back to your comment, you 

said that the regulations won’t be ironclad. I think that was the 

terminology you used. 

Ms. ROSEMAN. Yes. I meant that I don’t think it is practical to 

be able to preclude the payment system from processing any unlawful Internet gambling transactions. There is going to be a proportion that will go through irrespective of our regulation. The 

question is, how large a proportion. 

Mr. MCHENRY. Any estimates? Any ideas? 

Ms. ROSEMAN. No. I don’t have any estimates on that. 

Mr. MCHENRY. So is it safe to say that the construct of the legislation is such that you are both going to have a very difficult time 

enforcing the legislation we passed? Or is that an understatement? 

Ms. ROSEMAN. No. I think it is very difficult without having more 

of a bright line on what is intended to be included as unlawful 

Internet gambling. That’s the first challenge. I think the second 

challenge is to figure out how to use the payment system to achieve 

the objective of cutting off the unlawful Internet gambling activity. 

Mr. MCHENRY. Now in terms of your discussions with State attorneys general, have they been extensive? Has there been any discussion on enforcement of this? 

Ms. ROSEMAN. No. Our discussions have been with the Department of Justice, but I do not believe we have talked to the State 

attorneys general. 

Mr. MCHENRY. Thank you, Ms. Roseman. Ms. Abend? 

24

Ms. ABEND. I am not aware of any conversations that we have 

had with them. 

Mr. MCHENRY. Okay. Well, thank you for your testimony. Thank 

you, Ms. Roseman. 

The CHAIRMAN. Mr. Chairman? 

Mr. MCHENRY. I would be happy to yield to my colleague. 

The CHAIRMAN. Thank you. I just wanted to clarify, when the 

gentleman from Alabama raised the question of the Justice Department, as chairman of the committee, it has generally been our policy to have before us as witnesses representatives from those agencies that come under our jurisdiction. I can’t remember a time either recently or in prior years when we had the head of a different 

agency before us; it becomes a jurisdictional issue. So I understand 

the concern here, but I can’t remember an attorney general or a 

representative of the Justice Department ever testifying before us. 

It is generally the case that the committees deal with representatives of the agencies that are under their jurisdiction. 

Mr. MCHENRY. What about the FTC, Mr. Chairman? 

The CHAIRMAN. We have partial jurisdiction over the FTC statutes. The FTC statutes, for instance, when we did the Privacy Act, 

we gave some duties to the FTC, among others. So we, whereas as 

Members—let me be clear—whenever a question of increasing the 

penalties, for instance, comes up, we don’t deal with that. We send 

it to the Judiciary Committee. So we have a shared jurisdiction 

over the FTC. 

Mr. MCHENRY. I yield back. Thank you. 

Chairman GUTIERREZ. I thank the gentleman from Massachusetts, the chairman, for that clarification. Indeed, this bill did go 

for hearings both before this committee and the Judiciary Committee because of the concerns with the Department of Justice, and 

we expect to call them at Judiciary to take up the issues with the 

Department of Justice. 

Again, Federal Reserve and Treasury clearly are under the jurisdiction of this committee, and that’s why they were called forward, 

as they are bringing all of the comments forward from the public. 

I would like unanimous consent to include in the record comments from the American Greyhound Track Operators Association. 

Without objection, it is so ordered. 

Would the gentlemen present care for a second round of questions? 

The CHARIMAN. We have some members who weren’t here for the 

first round. 

Chairman GUTIERREZ. Oh, I’m sorry. Dr. Paul, you are recognized for 5 minutes. I am so happy to see you. 

Dr. PAUL. Thank you, Mr. Chairman, and I’m sorry I am late. I 

had another hearing. But let me just make a very brief statement, 

and I don’t have any particular questions here. But I did want to 

be on record in opposition to the regulations as well as the legislation that stands dealing with Internet gambling. 

I have always taken the position that though I do not endorse 

gambling per se, people should make their own decisions. It’s a personal choice. And I have always been concerned that this type of 

legislation and regulation is is likely to open the door, as I believe 

25

it already has, to the control and invasion of the Internet itself. 

And I think the Internet has to be protected. 

But I think that there are decisions that individuals make, and 

they can make mistakes, but I believe those decisions, whether it 

has to do with how they spend their money or what they put in 

their mouths or what they smoke, they do it at their own risk. But 

I also extend that belief to a personal belief that in economics, people ought to be allowed to do that, too, and spend—and have economic transactions at their own risk, and government shouldn’t be 

there to promote virtue or ethical standards, and they shouldn’t—

the government shouldn’t be there to promote what they see as a 

fair economy. 

So it’s sticking to those principles that government interference 

in this manner usually is not beneficial. I have a written statement, Mr. Chairman, that I would ask unanimous consent to submit for the record, and I would like to yield back. 

Chairman GUTIERREZ. Without objection, it is so ordered. 

Mr. Sherman is recognized for 5 minutes. 

Mr. SHERMAN. Thank you. I know the gentleman from Texas is 

dedicated not only to individual liberty but also States’ rights, and 

gambling has traditionally been regulated by the States. It is not 

a decision of Congress but technology that has undermined that 

regulation and it is the attempt of the law that we are dealing with 

here today to restore what has been a traditional province of the 

States. I’m sure the gentleman from Texas would agree more with 

the decision of the State legislature in Carson City than perhaps 

the State legislature of his own State with regard to whether gambling should be allowed. 

The credit card system has been using a coding system to block 

restricted payments for Internet gambling. I wonder if the witnesses could respond to why this same system wouldn’t work for 

other payment systems. 

Ms. ROSEMAN. The card systems have a very different design 

than other payment systems. The card systems have been designed 

to include a code going along with the authorization request that 

indicates what type of merchant the transaction took place at, such 

as a restaurant, a gaming organization, or an airline. 

If you look at, for example, the check system, there is no such 

code and given the design of the check system, no practical way to 

include such a code. And so I think it would be very difficult to extend the concept that is in the credit card system to systems such 

as check system or wire transfer. 

Mr. SHERMAN. That is a concise and good answer. I thank you. 

One of the serious concerns related to Internet gambling is money 

laundering. Why wouldn’t the same procedures used to combat 

money laundering and terrorist financing work to address illegal 

Internet gambling? 

Ms. ROSEMAN. Money laundering is a global concern. Banks 

around the world focus on this issue. Many Internet gambling businesses are not in the United States; they are offshore in countries 

where this is activity is permissible. So the banks in those countries have no incentive to flag those particular transactions because 

they are legitimate commercial transactions— 

26

Mr. SHERMAN. So we would be in the position of either allowing 

Internet gambling or cutting our financial ties to those small Caribbean countries if we thought it was more important? 

Ms. ROSEMAN. And I think it goes beyond just small Caribbean 

countries. There could be Internet gambling activity going through 

major correspondent banks in other countries where it would be 

impractical for U.S. correspondents to cut off those relationships, 

which have substantial international payment flows. 

Mr. SHERMAN. What is the largest country economically that allows Internet gambling and that demands that U.S. citizens be allowed to gamble over the Internet if the site is located in their 

country? 

Ms. ROSEMAN. That I do not know off the top of my head. I’m 

sorry. 

Mr. SHERMAN. I yield back. 

Chairman GUTIERREZ. The gentleman yields back. Are there any 

further members? 

Dr. Paul? Any further questions? 

[No response] 

The CHAIRMAN. If I could just get an answer to the question 

about whether or not it makes a difference if you’re in the 5th Circuit, because the 5th Circuit did in 2002 give a ruling on the legality of some horse race betting. I know Justice doesn’t agree. Under 

the regulations, would it make any difference if I were a financial 

institution in the 5th Circuit or if the activity happened in the 5th 

Circuit? 

Ms. ROSEMAN. If you’re talking about horse racing— 

The CHAIRMAN. Yes. 

Ms. ROSEMAN. In our regulation, we did explicitly exclude horse 

racing permitted under the Interstate Horse Racing Act, as did the 

Act itself. We just did not define— 

The CHAIRMAN. Well, I understand that. But the Justice Department is saying one thing. The 5th Circuit has had a ruling. Does 

it make any difference? Do I get any protection from the fact that 

the 5th Circuit has ruled that it is permitted? 

Ms. ROSEMAN. I would assume if you were in the 5th District, 

you would have that protection— 

The CHAIRMAN. In the 5th Circuit? 

Ms. ROSEMAN. —from that court’s rulings. 

The CHAIRMAN. One last question. You said those contests, you 

could bet on those contests which were a combination of skill and 

chance. Would it be legal to bet on elections under this? 

[Laughter] 

Ms. ROSEMAN. You know, we posed that question recently to the 

Justice Department because there are predictive markets Web sites 

where you could bet on the outcome of a presidential election and 

a number of other things. Justice considered that subject to chance. 

That was their interpretation. 

The CHAIRMAN. So that is illegal? 

Ms. ROSEMAN. That is their interpretation. 

The CHAIRMAN. Betting on an election. Thank you. 

Chairman GUTIERREZ. I believe Dr. Paul has some documents to 

submit. 

27

Dr. PAUL. Right. Mr. Chairman, I ask unanimous consent to submit two letters on behalf of Congressman Bachus. 

Chairman GUTIERREZ. Without objection, it is so ordered. 

The CHAIRMAN. Let me just say, because my colleague from Florida raised New Hampshire, at this point I am prepared to say that 

the New Hampshire primary is pretty much a game of chance. 

[Laughter] 

Chairman GUTIERREZ. Let me thank the witnesses. I will tell 

both Ms. Abend and Roseman that I have chaired about half a 

dozen of these hearings, and I have never had this kind of participation and activity, which says be careful about where you go with 

these regulations. I mean, there is a lot of interest. Obviously, 

there is a lot of interest on the part of the members of this committee and the Members of the House of Representatives, at least 

if the participation today is any indication, and I think it is an indication. 

So we will work with you as we move forward. I just think you 

have one heck of a complicated job when, you know, you have 

major broadcasters saying the Kentucky Derby, everybody knows 

the gentlemen are betting. And for those of you who—I mean, there 

is so much betting going on in America that this is going to be a 

very difficult challenge for you. I hope you can outlaw the foursome 

in front of me on the golf course on those spots stopping those bets, 

so that I can get through the day a lot quicker. 

[Laughter] 

Chairman GUTIERREZ. Thank you so much. We will— 

The CHAIRMAN. And Mr. Chairman, I think there are only three 

votes, so we should be back fairly quickly. 

Chairman GUTIERREZ. We will adjourn to vote and come right 

back. Thank you so much. 

[Recess] 

The CHAIRMAN. [presiding] Thank you. The first panel was a 

lengthy one, but I don’t think to the disappointment of any of those 

who are here with us. Chairman Gutierrez has Judiciary Committee business, and they are voting, so I will start this off. 

We have our second panel of people from the financial service industry in particular, and we will begin with Harriet May who is 

the president and chief executive officer of GECU of El Paso, and 

she is speaking on behalf of the Credit Union National Association. 

Please tell our former colleague, Mr. Mica, our good friend, not to 

worry about the proposal to abolish the credit unions. We would 

never do that. So we will just ignore that part of the Paulson plan. 

Don’t worry about anything. You can go ahead. 

STATEMENT OF HARRIET MAY, PRESIDENT AND CEO, GECU 

OF EL PASO, TEXAS, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION (CUNA) 

Ms. MAY. That is a very nice welcome, Mr. Chairman, and thank 

you for allowing me to testify before this subcommittee. The issue 

of the Unlawful Internet Gambling Enforcement Act of 2006 is 

disconterting, and it is my privilege to testify on behalf of the Credit Union National Association. 

I am, as you said, Harriet May, president and CEO of GECU in 

El Paso, Texas. I am a member of the CUNA Board of Directors 

28

and serve as CUNA’s board secretary. CUNA is the largest trade 

association for credit unions, representing 90 percent of the Nation’s 8,400 State and Federal chartered credit unions, which in 

turn serve over 90 million members. 

GECU, formerly known as Government Employees Credit Union, 

has served the families of El Paso since 1932, and we’re the largest 

locally owned financial institution in the area, with just over $1.4 

billion in assets and serving over 277,000 members. 

When I received the invitation to appear today, I must say I relished the opportunity to talk with you about the range of serious 

and practical concerns that CUNA believes will make compliance 

under the Act extremely difficult, if not impossible, for financial institutions. 

One of our most fundamental concerns with the implementation 

of this law is that credit unions and other financial institutions are 

in business to provide financial services to communities, and we 

are already burdened with heavy policing responsibilities. For example, our compliance duties under the Bank Secrecy Act and Office of Foreign Assets Control rules are extraordinary. We do not 

think that the Internet gambling law could possibly be implemented without creating a list similar to that published by OFAC. 

We are equally concerned that while institutions would be required to identify and block transactions that fund illegal gambling 

activities, the proposed rules provide no mechanism to verify when 

a payment transaction is intended for illegal Internet gambling. 

H.R. 2046, the Internet Gambling Regulation Enforcement Act, 

introduced by House Financial Services Committee Chairman Barney Frank, would require Internet gaming businesses to be licensed and pay user fees to the Financial Crimes Enforcement Network. The bill could be the vehicle for the Department of Justice 

to take the lead in not only monitoring the entities that are complying with registration but also developing a list of those businesses or individuals involved in illegal Internet gambling activities. Such an approach would promote compliance for institutions 

by providing them a greater level of certainty as to whether a 

transaction for a particular entity should be prevented. Exemptions 

and safe harbor provisions would help provide a regulatory framework that might actually work. 

Under the Act, institutions must establish and implement policies and procedures to identify and block restricted transactions or 

rely on those established by the payment systems. We are concerned that the scope of these requirements is not realistic. To illustrate, the proposal calls for participants, including card issuers, 

to monitor certain Web sites to detect the unauthorized use of a 

covered payment system, and to monitor and analyze payment patterns. Such activities would be time consuming and detract from an 

institution’s own business purposes. 

Also, the proposal directs covered entities to address due diligence without defining or explaining what is meant by that term. 

In addition, the Act states that institutions that reasonably believe 

a transaction is restricted will not incur liability for incorrectly 

blocking the transaction. We appreciate the safe harbor but need 

clear guidance on what is necessary for institutions to show that 

their belief was reasonable. The Federal financial regulators will be 

29

responsible for enforcing the rule. However, it is not clear how this 

enforcement would occur. 

And lastly, the Act does not include an effective date. While we 

do not believe this proposed regulation should be promulgated, if 

the agencies are required to proceed, institutions should have at 

least 18 months if not longer to determine how to meet the new 

requirements. 

And in summary, Mr. Chairman, CUNA certainly appreciates 

your leadership in reviewing this matter. We don’t condone illegal 

Internet gambling or want to see it continue or grow. However, the 

current statute and implementing proposal contain several components of great concern. We respectfully urge that the proposal not 

be finalized and that Congress take action to address hardships 

that would otherwise arise. 

Thank you, Mr. Chairman. 

[The prepared statement of Ms. May can be found on page 91 of 

the appendix.] 

The CHAIRMAN. Ms. May, thank you both for the cogency and for 

being the first witness I have ever seen in 28 years hit 5 minutes 

exactly. 

[Laughter] 

The CHAIRMAN. May your tribe increase. 

Ms. MAY. Thank you. 

The CHAIRMAN. I thought your testimony was also substantively 

very welcome. 

Next we have a familiar face for us, Wayne Abernathy, who is 

testifying on behalf of the American Bankers Association. Mr. 

Abernathy. 

STATEMENT OF WAYNE A. ABERNATHY, EXECUTIVE VICE 

PRESIDENT, FINANCIAL INSTITUTIONS POLICY AND REGULATORY AFFAIRS, AMERICAN BANKERS ASSOCIATION (ABA) 

Mr. ABERNATHY. Thank you, Chairman Frank. We appreciate 

this opportunity to comment on the Unlawful Internet Gambling 

Enforcement Act of 2006 and the proposed rule implementing the 

Act. ABA members have a strong record in the fight against financial crime. We have invested enormous resources in fulfilling our 

obligation to report criminal or otherwise suspicious activity under 

the anti-money laundering laws. 

The Unlawful Internet Gambling Enforcement Act takes banks 

beyond the role of reporting potentially or allegedly illegitimate financial activity, and makes financial institutions the police, prosecutors, and judges in place of real law enforcement officers when 

it comes to the practice of unlawful Internet gambling. 

Banks are saddled with this exceptional burden, using the words 

of the Act, ‘‘Because traditional law enforcement mechanisms are 

often inadequate for enforcing gambling prohibitions or regulations 

on the Internet.’’ That is to say, all the sophistication of the FBI, 

Secret Service, and other police investigation methods is inadequate to apprehend the unlawful gambling business or confiscate 

its revenues. 

ABA believes that punting this obligation to the banking industry is an unprecedented delegation of governmental responsibility, 

with no prospect of practical success. 

30

The modern payment system is constructed to facilitate fast, reliable payments at low cost. It is no exaggeration to say that nearly 

all other economic activity in the Nation, in one way or another, 

relies upon the payment system. Hundreds of millions of payments 

are processed each day, about 100 billion each year. The burdens 

placed upon financial institutions by the Act would compromise the 

efficiency of the payment system and yet would not curtail Internet 

gambling. 

At the core of the problem is the lack of a usable definition of 

‘‘unlawful Internet gambling,’’ a definition that neither the statute 

nor the regulations provide. Banks would be required to institute 

policies and procedures to block unlawful transactions without 

being sure which parties or transactions to block and when. This 

is not a reasonable undertaking. 

It is one thing for banks to report suspicious activity based upon 

their judgment of the possibility of illegal conduct. It is quite another to require a bank to act on its own judgment about legality 

and impose sanctions for such determinations. ABA believes that 

the flaws in the definition of ‘‘unlawful Internet gambling’’ are fatal 

to this effort as a legal policy and a practical matter. 

Even if a good definition could be devised, identifying commercial 

customers engaged in unlawful Internet gambling is very difficult. 

All commercial customers would be subjected to screens, filters and 

other processes that might be developed in the effort to enforce the 

law. These screens and other processes would almost entirely depend on information obtained from the customers. Since neither illegal Internet gambling enterprises nor their customers are likely 

to be up-front about their activities, monitoring transactions will 

fail to catch most illegal gambling payments. 

The cross-border provisions of the act and the proposed rule further complicate the situation. They require financial institutions in 

the United States to rely on foreign correspondent banks to interpret and enforce the Act, a responsibility that is not supported by 

international law. 

In conclusion, there are realistic limits to how the payment system can be used effectively to solve the problems raised by illegal 

Internet gambling. The Act and the proposed rule do not provide 

a rational path towards halting unlawful Internet gambling. Rather, the path leads to increased cost and administrative burden for 

banks, and erosion in the performance of the payment system, 

without stopping illegal Internet gambling transactions. 

Thank you very much, and I’m happy to take any questions. 

[The prepared statement of Mr. Abernathy can be found on page 

45 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Abernathy. 

And next we have, testifying on behalf of the Financial Services 

Roundtable, Mr. Leigh Williams. 

STATEMENT OF LEIGH WILLIAMS, BITS PRESIDENT, THE 

FINANCIAL SERVICES ROUNDTABLE 

Mr. WILLIAMS. Thank you, Chairman Frank, for the opportunity 

to testify on the proposed rules arising from the Unlawful Internet 

Gambling Enforcement Act, and on H.R. 2046, the Internet GamVerDate 0ct 09 2002 11:28 Jun 19, 2008 Jkt 042714 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 K:\DOCS\42714.TXT TERRIE
31

bling Regulation and Enforcement Act, which contemplates the creation of a regulatory framework for permissible online gambling. 

My name is Leigh Williams, and I am the president of BITS, the 

operations and technology division of The Financial Services 

Roundtable. My members, 100 of the largest U.S. financial institutions, have carefully reviewed the proposed rules, and I would like 

to share three impressions from that review with you this afternoon. Our full analysis is available in a comment letter which we 

filed with the Federal Reserve and the Treasury and which was 

submitted with my written testimony. 

To provide context, let me say first that as a former chief risk 

officer and as BITS president, I share the concern of the subcommittee and the agencies about potential abuse of the financial 

payment system for illegal purposes. My members devote substantial resources to knowing their customers and identifying suspicious transactions. Fraud prevention has become an industry core 

competency, in fact, and individual firms have literally hundreds of 

people dedicated to anti-money laundering programs, OFAC blocking, and suspicious activity reporting. 

I am, however, concerned that this policing activity may be 

reaching a point of diminishing returns, where its cost in risk management resources and customer disruption may be greater than 

its benefit in enforcement. I have three concerns in particular 

about facets of the proposed rules that elevate the compliance burden without commensurate benefit. 

First, the agencies have chosen not to fully define ‘‘unlawful 

Internet gambling,’’ as we have heard this morning, but they presume that institutions could assemble and interpret definitions 

themselves based on pronouncements from the Justice Department 

and others. The very complexity that deterred the agencies from 

issuing a definition will be multiplied a thousand fold if thousands 

of institutions are required to establish their own working definitions. 

We urge the subcommittee and the agencies to work toward more 

specificity on the scope of ‘‘unlawful Internet gambling.’’ 

Second, the rules require that institutions block the use of the 

payment system by known unlawful gambling businesses or for 

funding known unlawful gambling transactions, but they do not 

specify whether this knowledge should come from existing monitoring activities or if additional policing is expected. Requiring institutions to act on knowledge arising from current surveillance is 

a more reasonable expectation than requiring an entirely new layer 

of surveillance. 

We urge the subcommittee and the agencies to moderate the 

operational burden of the rules by leveraging rather than 

supplementing our current policing efforts. 

Finally, my members are concerned about the legal exposure associated with both false positives and false negatives. In spite of 

our best efforts, we are likely to block some legitimate business, 

and we may well miss some well-concealed illegal activity. If institutions are to be given police powers, and in fact policing obligations, some limited form of the liability shield granted to public 

servants should also be granted to institutions applying their policies and procedures in good faith and in the public interest. 

32

Before I close, I’d like to comment briefly on H.R. 2046, the Internet Gambling Regulation and Enforcement Act. I will leave it to 

the judgment of the Congress whether to allow or prohibit online 

gambling, but I will offer my thoughts on the extent to which the 

bill might moderate my three stated concerns about the proposed 

rules: 

First, creating a distinct category of permissible regulated gambling will reduce and may nearly eliminate the unlawful Internet 

gambling that we otherwise may be required to define. The scope 

of prohibited activity will be narrower, and with FINCEN’s proposed involvement, it should also be clearer. 

Second, the licensing of legitimate operators will simplify our institutions’ surveillance activities by identifying a population of customers that we know are subject to specific requirements. However, 

the question remains of our institutions’ duty to identify covert 

gambling operations and concealed gambling transactions. 

Finally, by creating a class of regulated gambling entities and 

then requiring that FINCEN actively police them, the bill may relieve some of the burden and legal exposure associated with our institutions serving in this role. 

While these concerns and others noted in our comment letter 

may not be entirely resolved by H.R. 2046, in my judgment the 

compliance burden to financial institutions would be substantially 

moderated. 

In closing, let me express my confidence that financial institutions will do everything that the final rules require of them, and 

many will do more. I urge only that the subcommittee and the 

agencies do everything in their power to be as clear and judicious 

as possible about what is expected. 

Thank you for your time. I would be happy to answer any questions. 

[The prepared statement of Mr. Williams can be found on page 

105 of the appendix.] 

The CHAIRMAN. This is a good day. You were also right on time. 

I am very grateful, because you have all put a lot of very substantive stuff in here. And finally, we have Mr. Ted Teruo Kitada, 

the senior company counsel of the Legal Group at Wells Fargo. 

STATEMENT OF TED TERUO KITADA, SENIOR COMPANY 

COUNSEL, LEGAL GROUP, WELLS FARGO & COMPANY 

Mr. KITADA. Thank you, Chairman Frank, for this opportunity to 

testify today regarding the Unlawful Internet Gambling Enforcement Act of 2006 and proposed regulations under this Act. 

In reviewing the proposed regulations and the Act, Wells Fargo 

has identified certain key issues. We would like to briefly highlight 

two of them for the committee: 

The definition of ‘‘unlawful Internet gambling’’ and the possible 

application of the final regulations to existing customers. 

First on the definition of unlawful Internet gambling, while the 

term is a core definition under the Act, ‘‘unlawful Internet gambling’’ is not clearly defined in the regulations. This term is defined 

as placing, receiving, or transmitting a bet or wager by means that 

involves the use of the Internet ‘‘where such bet or wager is unlawful under any applicable Federal or State law.’’ 

33

By referencing the State or Federal laws, the banking industry 

is burdened with the responsibility of identifying, interpreting, and 

applying those laws. We handle at Wells Fargo a significant number of transactions daily, and just to have some sense of the volume, I have set forth the numbers with regard to ACH, check, and 

wire systems transactions. 

For the ACH system, we originate in excess of approximately 3.1 

million debit transactions daily. As a receiving depository financial 

institution, we receive daily approximately 1.2 million credit transactions. In the check collection system, we handle daily about 11 

million checks. In the wire transfer system, where as a beneficiary’s bank, we have responsibility to identify restricted transactions, we handle approximately 25,000 to 30,000 wire transfer 

transactions daily. 

As an originator’s or intermediary’s bank, with regard to wire 

transfers directly to foreign banks, we handle about 5,000 to 6,000 

thousand transactions daily. 

As you can see by just the sheer volume of transactions that we 

handle, having the responsibility to identify and block restricted 

transactions would be a significant undertaking for us. 

Next on the applicability of the proposed regulations to existing 

customers, we are concerned that when the final regulations are 

issued, those regulations will apply to our existing customers. We 

have presently about 24 million consumer customers and about 1.8 

million business customers, and we are concerned that the final 

rules will apply to that population. 

Under the USA Patriot Act, we have been complying with the 

due diligence requirements under the regulations issued under the 

Act since October 1, 2003, but there is a significant number of customers about which we may know less because those customers 

have not been subject to the robust due diligence requirements 

under the USA Patriot Act. 

There are further requirements under the proposed regulations 

to implement policies and procedures with regard to the existing 

customers. As a merchant customer provider, Wells Fargo has approximately 140,000 merchant customer relationships. We would 

be required under the best practices advanced under the proposal 

to adopt amendments to those merchant agreements to provide 

that those merchants were not introduce restricted transactions to 

the card system. We are concerned about that requirement. 

As the originator’s bank and intermediary bank on foreign wire 

transfers going directly to foreign banks, we are required to block 

and perhaps even close those relationships where we have identified restricted transactions. 

We are concerned that in connection with those rights, amendments to existing foreign banking relationship agreements would 

be necessary and that we will have to provide for such amendments with over 200 correspondent foreign banking relationships. 

These observations conclude my remarks, and I will be pleased 

to field any questions the committee may have. Thank you. 

[The prepared statement of Mr. Kitada can be found on page 59 

of the appendix.] 

Chairman GUTIERREZ. I recognize the subcommittee ranking 

member first, so, Dr. Paul, you are recognized for 5 minutes. 

34

Dr. PAUL. Thank you, Mr. Chairman. 

Chairman GUTIERREZ. Thank you. 

Dr. PAUL. I have a couple of brief questions for the panel. Anybody who feels like answering them can. They are general, and you 

may have touched on this in your testimony, but I wanted you to 

emphasize it if you have not. 

First, I want to talk about the potential cost that might be put 

on you for doing this. There always has to be a dollar cost when 

we write regulations, nobody really knows about it, but I’m sure 

you have anticipated it. Is there any way you can quantify that figure? ‘‘Well, this is going to cost me so much.’’ I was in the medical 

field and they would come in with regulations and we would have 

managed care. All of a sudden, you might have to hire three new 

people for your office. 

I’m wondering whether there’s a cost, do you have to have more 

people involved and looking after regulations like this and the 

hours that might be involved? 

The other concern I have is the amount of records that we keep. 

There has been financial regulation for a long time, since the 

1970’s when it really got busy and required a lot of financial regulations, and even before 9/11, there was a tremendous amount of 

financial regulation sitting out there. And it gets to the point 

where the regulations and the information that is accumulated 

loses its effect because there is too much. 

So there is a lot of information on innocent people, and then the 

people who figure, well, we’re going to do this illegally, maybe they 

will have a trick, and it really doesn’t achieve what you are supposed to be achieving. I’m just wondering whether you see that as 

a complication where, yes, you can do your best and accumulate a 

lot of records, but there will be so many records that nobody gets 

to sort these out. In spite of all the technology we have here, government sometimes tend to be inept and they have too much information, so they can’t make good use of it. 

And the other point that I want to ask about is, do you feel like 

there’s a burden placed on you unfairly where you might have to 

make a judgment and a decision on what is legal and what is illegal? Is that burden ever placed on you where it seems like that is 

one of the proper roles of government, deciding what is legal and 

illegal rather than putting the burden on the business person or financial institution to decide, oh, it’s my judgment, you know, to decide what is illegal and what we should report? 

Those are the general concerns I have. Does anybody want to 

make any comments on those issues? 

Mr. ABERNATHY. Yes, if I may, Congressman Paul, can I take 

them in reverse order? 

Dr. PAUL. Fine. 

Mr. ABERNATHY. Because I think that is the way that really sets 

up the questions. The first problem really is, what makes this requirement different from, for example, the Bank Secrecy Act, AntiMoney Laundering, is that under this piece of legislation and the 

regulations that will back it up, we’re required not only to identify 

whatever might be unlawful, but we’re actually required to impose 

a sentence. We’re told to deny financial services to someone whom 

35

we determine is engaged in unlawful activity, unlawful Internet 

gambling. 

So the first problem is, this goes beyond reporting, which is what 

we do under BSA. Under the Bank Secrecy Act, Anti-Money Laundering, we see something that we think is improper, and we report 

that. And the law enforcement folks then take their responsibility 

and they do what they feel is appropriate to do with that. We are 

now told, look at it. If you determine it’s wrong, you impose the 

sentence. And we think that’s a step too far in devolving governmental responsibility. 

That leads to the second point, which I think requires a comparability in terms of cost. It’s very difficult really to put a cost on 

something that isn’t in place yet, and particularly if it’s something 

that could go in any number of different ways in terms of how the 

enforcement burden is defined. But I would give as an analogy the 

costs that are imposed under the Bank Secrecy Act, even though 

taking into account how that’s different from what I said. A typical $100 million bank, a bank with $100 million in assets—

that is about the size of the average ABA member, although we 

have banks of all sizes in our membership—tells us that they have 

two to three employees who do nothing but compliance efforts with 

Bank Secrecy Act/Anti-Money Laundering. They don’t do anything 

to serve a customer. They don’t provide loans. They don’t provide 

any service other than meeting the paperwork burden. And as you 

correctly point out, nearly all of that burden is gathering data on 

law-abiding people conducting legal transactions. That is how this 

could eventually evolve. 

And then the last point that I would make, what defies really 

predicting the cost of all of this is we don’t know what is unlawful, 

what is illegal, and as long as that burden is upon us, estimate it 

is going to be pretty close to impossible. 

Dr. PAUL. Thank you. Any— 

Mr. WILLIAMS. Mr. Paul, if I might offer a couple of comments 

regarding cost. One is that I would echo what Mr. Abernathy has 

said about the regulatory uncertainty ironically making it very difficult for us to estimate what the ultimate cost of compliance might 

be. 

Chairman GUTIERREZ. The gentleman’s time has expired. Chairman Frank is recognized for 5 minutes. 

The CHAIRMAN. Mr. Kitada, I’m told in your comment letter and 

elsewhere you have also noted that we can’t be sure what entities 

are covered, that ‘‘financial institution,’’ as the statute defines it, 

may sweep more widely than people would ordinarily think. Could 

you comment on that? 

Mr. KITADA. With regard to the definition of financial institutions— 

The CHAIRMAN. The transmitters of money. 

Mr. KITADA. Oh, money transmitters? Yes. Under the Act, there’s 

a reference to the definition of money transmitters, and in contrast, 

there’s also under the regulations issued by the Treasury under a 

definition for money service business, and with regard to the 

money service business, there is a exclusion or safe harbor for 

check cashers that cash items regularly for under $1,000. And 

there’s no such exclusion under the Act. And so consequently, with 

36

regard to money transmitters, that population of check cashers who 

heretofore may have enjoyed a safe harbor under the Bank Secrecy 

Act, will now become subject to this Act and to the requirements 

for developing policies and procedures. And it also raises some 

challenging questions for the industry in terms of policing the behavior of money transmitters. 

The CHAIRMAN. Well, that is very important. That is what I 

wanted to get to. And, again, I want to stress, we can divide this. 

Congress of course has the right, I believe, to ban gambling. I don’t 

agree with it. I share the views of my colleague from Texas and 

others that it ought to be a matter of personal liberty. 

But there is a second question, if we decide to do it, as to how 

to do it. And in effect, what this does, this law, is to draft the financial service industry, in effect deputize the financial service industry and turn them into the enforcers of the law. It seems to me 

we can go at this at the two levels. 

But here is part of the problem. You have due diligence requirements, etc. You have all these customers. What troubles me is, and 

there is a letter from Grover Norquist on behalf of a coalition of 

organizations raising questions about privacy. What I am afraid of 

is that there is a conflict between the obligation imposed on you by 

the Act to do due diligence and to see whether or not people are 

trying to get around this, and the privacy expectations of your customers. 

Mr. Abernathy, is that an accurate description of the dilemma? 

Mr. ABERNATHY. I think that’s very accurate. A bank is really in 

the position of having to make one decision: cut off all transactions 

that look in any way like they might be heading toward illegal 

Internet gambling, or become very intrusive in the kinds of questions we ask, so that we can make the decision the Act forces us 

to make. 

The CHAIRMAN. And one of the things it will do, as I said, is to 

draft you to be the law enforcement people. We have seen this in 

other cases. What you can envision is a tremendous increase in 

complaints about the financial institutions to the consumer protection agencies because the Federal Government has made you do it. 

And a lot of customers who are going to find themselves having 

their transactions cut off or blocked aren’t going to realize that this 

is something imposed on you by the Federal Government. I think 

the recipe for problems here is just enormous, because you are 

being put in this position where you have to do this. 

Let me go back to the horse racing question. If I am a bank, do 

I have to block someone who has made a bet on a horse race in 

a State where horse racing: (a) was legal; (b) wasn’t legal; (c) 

wasn’t legal, but it is in the 5th Circuit; or (d) all of the above? 

Mr. ABERNATHY. I think one of the problems is, even though you 

might know where the race took place, you don’t know where the 

bet is coming from, if you’re talking about the Internet. 

The CHAIRMAN. And that’s the determinant, not where the race 

took place—so in other words—okay. 

Mr. ABERNATHY. You have two or more places you have to be 

worried about—where did the transaction take place, where did the 

event take place, where did the person who was doing the activity, 

where were they when— 

37

The CHAIRMAN. I don’t have to meet both. And of course, it would 

never—well, presumably it would never be legal to bet on the—or 

we don’t know that. I mean, what do you advise your client then? 

Mr. ABERNATHY. We would advise them—I mean, we frankly, as 

a trade association, can’t give them specific advice, but what I suspect they would do is they would just block the transaction, and 

that gets back to Mr. Paul’s point. We would block a lot more legal 

transactions in the effort to avoid being tagged for failure to block 

the illegal one. 

The CHAIRMAN. One of the issues that has been occupying us is 

the competitive aspect. We have been told that we have to be careful, whether it is Section 404 of Sarbanes-Oxley or other things, 

about driving financial business out of America. If we were to 

adopt tomorrow as the major league sports—as the major sports 

league want, if we were promptly to adopt the pending regulations, 

would that have any effect on the competitive position of American 

financial institutions in the world? 

Mr. ABERNATHY. I think the biggest impact would be that it begins to—well, more than begins—it continues to compromise the 

quality of the payment system. It’s not just the banks themselves, 

but you’re now putting a new burden on what is one of the fundamental purposes of the banking system, and that is to make sure 

payments can be made between parties as quickly, as efficiently, 

and at as low a cost as possible. We have now compromised that. 

The CHAIRMAN. Any others? 

Mr. WILLIAMS. I think there are three ways, Mr. Chairman, that 

we might undermine competitiveness. One is we might be required 

to increase compliance costs to the point where they would become 

a threat. We might disrupt customer service, particularly in this 

overblocking to the point where that would become a real issue, or 

we might divert resources from other more critical risk management activities. And that also could put the industry and customers 

at risk. 

The CHAIRMAN. I am going to close by saying, as the chairman 

of this committee, that we have some responsibility to try and facilitate the functioning of the financial system. You know, just as 

you are being drafted by the bill, I think our committee was drafted, although by its own leadership, to do this. If our colleagues 

want to go on an anti-gambling crusade, well, I can’t stop them 

necessarily, but I would hope we could stop them from burdening 

this committee and our jurisdiction, the financial services institutions, from getting entangled in it. 

Thank you, Mr. Chairman. 

Chairman GUTIERREZ. Are there any further questions from 

members of the subcommittee? 

[No response] 

Chairman GUTIERREZ. I want to thank the panel for having come 

together, because I think we have had a rather rich discussion 

where Dr. Paul and Chairman Frank really don’t want us involved 

in the regulatory matters at all in terms of legislating the morality 

of gambling and betting. 

I might be convinced that there might be some use to doing that 

here in Congress, but what I’m not convinced is that financial institutions should be the sheriff, should be the people making the deciVerDate 0ct 09 2002 11:28 Jun 19, 2008 Jkt 042714 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 K:\DOCS\42714.TXT TERRIE
38

sions. Because I think that you have a relationship with the public 

in general which is much more important than this one, and I just 

don’t know how we do it. 

And so we’re going to be very careful with Treasury and the Federal Reserve Board as they come up with the regulations, because 

if you have never gotten your credit card statement and made a 

call to your credit card company about a particular billing amount 

because you didn’t recognize the store, you didn’t recognize the 

amount, maybe you’re not being as careful as I and others are 

when they get their credit card statements, because I have certainly on many occasions had to call my credit card company so 

they could explain to me the company and the nature, because 

there are so many companies that when you charge something, 

have a totally different name when it comes up on your credit card. 

Now when they tell you the address and what they do, you’re okay, 

I remember, I did that. That was a charge. 

So we all do that day in and day out, checking our credit card 

statement. I would hate to think about what banks and other financial institutions and credit card companies would have to do in 

order to do that. And I’m no great friend of the credit card institutions and financial institutions and feeling sorry about their processing of forms, because many times when I call, I find out that 

$2 overdraft on that Starbucks coffee which they said we just 

couldn’t avoid is all of a sudden $120. 

And I know all of you know that happens every day in America. 

You get a debit card, give it to your kid, you figure they can’t use—

now, interesting, they can’t get the $2 in cash, but they can get the 

overdraft of $2 on that Starbucks coffee on that day. And it will 

take them a week, and it’s $10 a day and it’s $20. 

So, I’m not here as a standard bearer for the credit card companies and the kinds—but I would think having an honest discussion 

about those overdraft statements and how much companies can 

charge is a much better function of the Financial Services Committee and regulating our economy and our relationship between 

your institutions and the public in general than doing the gambling 

thing. And how we do remittances and payday lending, and the extraordinary amounts of interest to the American public. I just think 

that those are much more important issues that I would like to engage all of you in. 

I appreciate your comments. I thank you for the comments that 

you made during the open period. I will tell you that I take them 

very, very seriously, as I know all of the members of this committee 

so, and without any further questions, I thank the members of this 

panel. I thank the previous panel, and I thank all of those who 

have come to participate in this hearing on gambling. 

Thank you so much. 

[Whereupon, at 12:52 p.m., the hearing was adjourned.] 

(39)

A P P E N D I X

April 2, 2008

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