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UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT AND THE INTERNET GAMBLING

LICENSING AND REGULATION COMMISSION ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON CRIME, TERRORISM, 

AND HOMELAND SECURITY

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

H.R. 21 and H.R. 1223

APRIL 29, 2003

Serial No. 25

Printed for the use of the Committee on the Judiciary

(

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

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

MELISSA A. HART, Pennsylvania 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

JOHN R. CARTER, Texas 

TOM FEENEY, Florida 

MARSHA BLACKBURN, Tennessee 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON CRIME, TERRORISM, AND HOMELAND SECURITY

HOWARD COBLE, North Carolina, Chairman

TOM FEENEY, Florida 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

ROBERT C. SCOTT, Virginia 

ADAM B. SCHIFF, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts

JAY APPERSON, Chief Counsel 

SEAN MCLAUGHLIN, Counsel 

ELIZABETH SOKUL, Counsel 

KATY CROOKS, Counsel 

PATRICIA DEMARCO, Full Committee Counsel 

BOBBY VASSAR, Minority Counsel 

(III)

C O N T E N T S 

APRIL 29, 2003

OPENING STATEMENT 

Page 

The Honorable Howard Coble, a Representative in Congress From the State 

of North Carolina, and Chairman, Subcommittee on Crime, Terrorism, and 

Homeland Security ............................................................................................... 1

The Honorable Robert C. Scott, a Representative in Congress From the State 

of Virginia, and Ranking Member, Subcommittee on Crime, Terrorism, 

and Homeland Security ....................................................................................... 2

WITNESSES 

Honorable James A. Leach, a Representative in Congress From the State 

of Iowa 

Oral Testimony ..................................................................................................... 5

Prepared Statement ............................................................................................. 7

Mr. John G. Malcolm, Deputy Assistant Attorney General, Criminal Division, 

U.S. Department of Justice 

Oral Testimony ..................................................................................................... 8

Prepared Statement ............................................................................................. 9

Mr. Jeffrey Modisett, Counsel, Bryan Cave, LLP, and former Attorney General, State of Indiana 

Oral Testimony ..................................................................................................... 13

Prepared Statement ............................................................................................. 14

Mr. William J. Hornbuckle, President and Chief Operating Officer, MGM 

Mirage Online 

Oral Testimony ..................................................................................................... 17

Prepared Statement ............................................................................................. 19

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

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

State of Texas ....................................................................................................... 25

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Prepared Statement of the Honorable Howard Coble, a Representative in 

Congress From the State of North Carolina, and Chairman, Subcommittee 

on Crime, Terrorism, and Homeland Security ................................................... 35

Prepared Statement of the Honorable Bob Goodlatte, a Representative in 

Congress From the State of Virginia .................................................................. 36

Questions submitted by Rep. Bob Goodlatte to John G. Malcolm and William 

J. Hornbuckle regarding H.R. 21, the ‘‘Unlawful Internet Gambling Funding Prohibition Act’’ ............................................................................................. 38

Response, with attachments, from William J. Hornbuckle to questions submitted by Rep. Bob Goodlatte ............................................................................. 39

Response from John G. Malcolm to questions submitted by Rep. Bob Goodlatte ....................................................................................................................... 69

Questions submitted by Rep. John Conyers, Jr., to John G. Malcolm regarding 

H.R. 21, the ‘‘Unlawful Internet Gambling Funding Prohibition Act’’ ............ 71

(1)

UNLAWFUL INTERNET GAMBLING FUNDING 

PROHIBITION ACT AND THE INTERNET 

GAMBLING LICENSING AND REGULATION 

COMMISSION ACT 

TUESDAY, APRIL 29, 2003

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON CRIME, TERRORISM,

AND HOMELAND SECURITY

COMMITTEE ON THE JUDICIARY, 

Washington, DC.

The Subcommittee met, pursuant to notice, at 2:04 p.m., in Room 

2237, Rayburn House Office Building, Hon. Howard Coble [Chairman of the Subcommittee] presiding. 

Mr. COBLE. Good afternoon, ladies and gentlemen. The Subcommittee on Crime, Terrorism, and Homeland Security will come 

to order. 

Today we are—at the outset I want to apologize to you all for my 

raspy voice. I have been plagued with a bad cold, so you all bear 

with me as we go along here. 

Today we address a serious and growing problem for our country: 

the problem of Internet gambling. It is now estimated that $4.2 billion is wagered over the Internet each year. This is an increase 

from $445 million just 6 years ago. There are currently more than 

1,800 Internet gambling sites, and the total dollar amount wagered 

worldwide is expected to reach $10 billion in the near future. 

The most troubling aspect of Internet gambling is the relative 

ease of accessibility for our Nation’s children. The anonymous nature of the Internet makes it almost impossible to prevent underage gamblers from using their parents’ credit cards, or even their 

own in some cases, to log on to a gambling website. Many Internet 

sites require nothing more than a name, address, and a credit card 

number. Those sites that do require a person to disclose his or her 

age make little or no effort to verify this information. 

Another group particularly susceptible to Internet gambling are 

Americans’ problem, or addictive gamblers. The National Council 

on Problem Gambling estimates that there are currently 11 million 

Americans directly suffering from gambling problems. High rates of 

financial debt, unemployment, bankruptcy, divorce, homelessness 

and suicide are all associated with problem gambling. Various casinos and their video game structure have been labeled ‘‘the crack cocaine of gambling’’. 

2

These facilities are open for the most part 24 hours a day, 7 days 

a week, all within a person’s own home. By making gambling more 

convenient, it can do nothing but make the problem worse. 

In addition to the social problems associated with Internet gambling, these Internet sites also offer organized crime groups a very 

simple and easy opportunity to launder the proceeds of their criminal activity. Because of the lack of oversight or regulations, and the 

high degree of anonymity, money laundering through Internet gambling sites is already a major concern to our Nation’s law enforcement agencies. 

Federal law is currently unclear as to whether or not all types 

of Internet gambling is illegal. The statute that most directly restricts the use of the Internet to place bets is the Wire Act under 

section 1084 of title 18 of the U.S. Code. However, because this 

statute was written prior to the age of the Internet and the use of 

the wireless communication, there is ambiguity as to what type of 

bettering is or is not covered. Also, the types of gambling mentioned in the statute may not cover all the different types of gambling available on the Internet. 

Today we will examine two bills that attempt to address the 

problems of Internet gambling in two very different ways. H.R. 21, 

the ‘‘Unlawful Internet Gambling Funding Prohibition Act,’’ introduced by our friend from the Heartland, Congressman Jim Leach 

of Iowa, seeks to ban Internet gambling by prohibiting the use of 

financial instruments such as credit cards in any transaction involving illegal Internet gambling. 

H.R. 3215, the ‘‘Combatting Illegal Gambling Reform and Modernization Act,’’ introduced by Congressman John Conyers of Michigan, the Ranking Member of the full Judiciary Committee, seeks 

to establish a commission to study the feasibility of regulating 

Internet gambling rather than banning it. 

I look forward to the testimony of the witnesses here today, 

which will help this Subcommittee decide what is the best approach to take with regard to this very important subject. 

Now, prior to recognizing the distinguished gentleman from Virginia, the Ranking Member, I am advised that a Member of our 

Subcommittee will be celebrating a date of birth tomorrow, and 

with your permission, sir, I will extend a ‘‘happy birthday’’ greeting 

to you. 

I now recognize the Ranking Member. 

Mr. SCOTT. Thank you, Mr. Chairman. 

You know, when I was growing up, we would always declare a 

‘‘birthweek.’’ I didn’t know that was going to extend to my congressional tenure. Thank you, Mr. Chairman. 

I am pleased to join you in convening this hearing regarding the 

Federal regulation of gambling over the Internet. I would also like 

to thank you and your staff for working with the minority on a bipartisan matter to develop the hearing and select witnesses for it. 

Mr. Chairman, gambling has traditionally been primarily a State 

regulatory responsibility. It should continue to be so, in my judgment, although it is appropriate for the Federal Government to 

have a role to assist States in the total regulatory scheme. The 

Federal Government undertook such a role in passing the 1961 

Wire Communications Act as a way to assist the fight against gamVerDate 0ct 09 2002 13:45 Jul 07, 2003 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6601 G:\WORK\CRIME\042903A\86705.000 HJUD1 PsN: DOUGA
3

bling by organized crime syndicates. The Department of Justice 

contends that it can prosecute Internet gambling businesses under 

that law, but clearly, that law was not designed with Internet gambling in mind. So I appreciate the desire of my colleague, the gentleman from Iowa, to update the ability of the Department to address illegal gambling in today’s context. 

However, I am concerned that his bill, H.R. 21, similar to the 

bills in the last several Congresses which attempted to regulate 

gambling, is not likely to be effective in doing so. When we address 

the real question on Internet gambling, we must acknowledge that 

the horses are literally already out of the gates. So let’s be clear 

that the bill is not about prohibiting Internet gambling; it is only 

about regulating Internet gambling, and then only with respect to 

the United States’ Internet gambling market. 

Regulating anything on the Internet is problematic, even when 

desirable. Most law enforcement is jurisdictionally dependent. The 

Internet has no jurisdiction and, as a result, I suspect that, even 

if we are successful in closing down business sites in the United 

States, or in countries that we can get to cooperate because of the 

Internet and electronic funds transfer, the approach of H.R. 21 will 

be ultimately ineffective. The gambling website can simply code an 

Internet gambling transaction as another type of transaction and 

thereby evade the total enforcement mechanism in the bill, or an 

e-cash or electronic payment system can relocate in another country and thereby evade the enforcement mechanisms in the bill. 

Furthermore, we should not overestimate the cooperation we 

might get from other countries. Presently, over 50 nations allow 

some form of gambling on line, and that number is likely to grow. 

And even if we’re successful in getting cooperation from most countries, it would simply be increasing the profit opportunities for uncooperative countries, especially those with which the United 

States does not have diplomatic relations. 

To be effective in prosecuting illegal gambling over the Internet, 

I think we have to prosecute individuals. This bill does not. If we 

took the approach in this bill in enforcing drug laws, we would be 

prosecuting the sellers but not the buyers. Prosecuting individuals 

in Internet gambling would be more effective than what we’re seeing in illegal drug prosecutions, because the technology of the 

Internet would be in the Government’s favor, since the activities of 

illegal gambling would leave a trail leading directly back to the individual gambler. So, so long as individuals can gamble over the 

Internet with impunity, a market will be provided for them which 

the regulatory scheme in this bill will not be able to stop. 

Since we are not talking about prohibiting Internet gambling but 

simply regulating it, I believe there is a more effective regulatory 

approach than offered by H.R. 21. However, the approaches must 

be developed taking into account the technology, State policies with 

respect to gambling, and Internet gambling practices and preferences. 

This is the approach offered by H.R. 1223, the bill before us authored by Ranking Member of the full Committee, Mr. Conyers. 

That bill establishes a commission that would study the issue and 

make recommendations for a regulatory environment for Internet 

gambling which would be controlled by individual States. States do 

4

tend to prohibit individuals from gambling, so Internet gambling 

can be both effective and individualized in each State. Under the 

regulatory environment the bill provides for, if Nevada opts to 

allow Internet gambling within its borders, it can. If Utah does not 

opt to allow Internet gambling within its borders, it can prohibit 

it, and that would be enforceable by the Federal Government by 

the States that allow gambling, as well as by the State of Utah. 

Under such a regulatory environment, it is much more likely 

that those who choose to gamble over the Internet will do so 

through a licensed regulated entity than one operating illegally. 

First, the consumer in a State where Internet gambling is legal 

will have confidence that, if they win, they will be paid. And in a 

licensed regulatory entity, such as MGM Mirage.com, we would not 

have to worry about the licensing authorities in Las Vegas failing 

to adopt stringent controls on access to its website. A consumer 

would have no similar confidence in a fly-by-night offshore casino.com, so a likely result from licensing and regulating Internet 

gaming activities would be to drive less reputable businesses out 

of business, particularly those that are offshore. 

Another significant result is, if States choose to authorize Internet gambling, it can tax it. At a time when unauthorized Internet 

gambling is flourishing, and when most States are cash-strapped, 

those States that already have chosen to authorize regulated gambling could receive much more needed revenues while contributing 

to the control of the industry and protecting the gambling public. 

I believe that we should regulate Internet gambling, but we 

should do it effectively. We should not allow any single business 

sector with the sole responsibility for doing the bulk of the work 

of enforcement, whether it is the banking industry as in this bill, 

or the Internet service industry as we tried in prior bills. There are 

ways to regulate Internet gambling effectively, and the commission 

approach to develop those ways is the best way to come up with 

them. 

Again, Mr. Chairman, I thank you for working with us on these 

two bills. I look forward to hearing the testimony of the witnesses, 

and I thank you for your birthday congratulations. 

Mr. COBLE. You’re indeed welcome. And you still don’t know how 

I came into that knowledge. I rarely have him guessing, but I have 

him guessing now. 

Folks, I believe members of the audience need to know something 

about our panelists, so I’m going to give brief introductory remarks 

prior to starting with Mr. Leach. 

Our first witness is the sponsor of H.R. 21, Representative James 

Leach. Congressman Leach has been a Member of Congress for 26 

years and represents the 2nd District in Iowa. During his tenure, 

Congressman Leach has invested a tremendous amount of time 

and effort on the issue of Internet gambling. The Subcommittee 

looks forward to his testimony on this complex issue. 

Our next witness is Mr. John G. Malcolm. Mr. Malcolm is currently a Deputy Assistant Attorney General in the Criminal Division of the Department of Justice, where his duties include overseeing the Computer Crime and Intellectual Property Section, the 

Child Exploitation and Obscenity Section, the Domestic Security 

Section, and the Office of Special Investigations. 

5

He is an honors graduate of Columbia College and the Harvard 

School of Law. Mr. Malcolm served as a law clerk to Judges on 

both the United States District Court for the Northern District of 

Georgia, and the 11th Circuit Court of Appeals. 

Our third witness is Mr. Jeffrey Modisett. Mr. Modisett is currently counsel for the law firm of Bryan Cave, LLP, in Los Angeles, 

CA, and has recently published articles concerning the States’ approach to on-line gambling, cyber-law, and e-commerce. 

An honors graduate of UCLA, Oxford University, and the Yale 

University School of Law, Mr. Modisett is also the former Indiana 

Attorney General. Mr. Modisett is the past president of the Family 

Advocacy Center, which he founded, and a former director of the 

National District Attorneys Association. 

Our final witness this afternoon is Mr. William Hornbuckle. Mr. 

Hornbuckle is president and chief operating officer of MGM Mirage 

Online, and executive vice president of marketing for MGM Mirage. 

He is a 23 year veteran of the gaming industry and was promoted 

to his current position in July, 2001. 

Mr. Hornbuckle has been serving as president and chief operating officer of the MGM Grand Hotel and Casino in Las Vegas 

since October, 1998. Prior to that role, he was executive vice president of operations for the resort. 

It’s good to have all of you with us. We have written statements 

from each of the witnesses on the panel. I ask unanimous consent 

to submit them into the record in their entirety. 

Gentlemen, as you all have previously been told, we try to adhere 

to the 5-minute rule here, both as to you all and to ourselves. So 

when that red light illuminates into your face, you will know that 

you’re skating on thin ice. So if you could wrap it up then. 

Mr. Leach, before you start, it’s good to have you with us. I am 

a country bluegrass music aficionado, and Merle Haggard, who was 

known for years as the ‘‘country balladeer’’, once recorded a song 

entitled, ‘‘The Kentucky Gambler.’’ Has anyone in the audience 

ever heard of the song? Well, the concluding words in his song were 

these: ‘‘...but a gambler loses much more than he wins.’’ A sad story 

about a guy who abandoned his family because he was an addictive 

gambler. 

So, having said that, Mr. Leach, it’s good to have you and the 

other people with us. Fire away. 

STATEMENT OF HONORABLE JAMES A. LEACH, A 

REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA 

Mr. LEACH. Thank you very much, Mr. Chairman, Mr. Scott, distinguished Committee counsel. Thank you for holding his hearing. 

Your leadership on this issue is deeply appreciated. 

As I have testified previously in this Committee, gambling on the 

Internet is fast becoming one of the critical issues confronting thousands of American families. The financial and economic implications of Internet gambling may not be intuitive to those unfamiliar 

with the workings of the industry, but the consequences cannot be 

exaggerated. It is simply not good for the economy at large, as well 

as each individual gambler, but the economy at large, to have 

Americans send billions to overseas Internet casinos which have 

shady or unknown owners. 

6

Casino gambling, while it competes for jobs with other sectors of 

the economy, such as restaurants and the retail trade, also partly 

balances job losses elsewhere with some job creation. Internet gambling, on the other hand, may be the only sector of the economy 

where the case of greater efficiency is not altogether compelling. It 

reduces jobs in competing parts of the American economy, but creates few in itself and all, to date, are abroad. In other words, this 

is a ‘‘jobs’’ as well as a moral and regulatory issue. 

The very characteristics that make the Internet such a valuable 

resource are also the reasons why it has such a huge potential to 

impinge on the stability of American financial institutions, as well 

as the American family. The easy access, anonymity, and speed of 

transactions which make such positive contributions to the level of 

efficiency and cost of financial services. also make routine safeguards impractical and leave the financial services industry open 

to abuse. Internet gambling increases consumer debt, makes bankruptcy more likely, money laundering an easy endeavor, and identity theft a likely burden. 

Gambling, in general, and Internet gambling in particular, provide one of the most accessible platforms for money laundering. 

Money launderers tend to seek out areas where there is a low risk 

of detection by law enforcement. Internet gambling is a particularly 

attractive method to launder money because of the heightened level 

of anonymity and a virtual lack of governmental regulation. Nearly 

80 percent of the $10 billion in revenue generated by Internet gambling sites is impossible to account for, since most operators are located in the Caribbean and other jurisdictions with loose regulatory 

structures and limited financial reporting requirements. 

Reports from the OECD’s Financial Action Task Force specifically point to Internet gambling as a major loophole in anti-money 

laundering regimes. The U.S. Treasury’s Financial Crimes Enforcement Network has a special anti-money laundering program designed for the traditional domestic gaming industry. No such strategy exists for illegal gambling sites located in unregulated offshore 

jurisdictions. Given the hard work of this Committee, and also that 

of the Financial Services Committee, to quash the money laundering efforts of terrorists and narco traffickers, it would be irresponsible to leave such an enormous institutional loophole 

unplugged. 

Suggestions to legalize and regulate Internet gambling address 

none of these concerns. No regulatory system can prevent the social 

and economic ramifications of online gambling. This was the conclusion of the National Gambling Impact Study Commission report 

issued in 1999. This congressionally mandated report concluded 

that Internet gambling should be illegal at the Federal level and 

suggested prohibiting the use of financial instruments for these 

transactions, thus serving as a model for this legislation. 

I stress this point, that we have had a national commission on 

gambling, that was congressionally mandated——

Mr. SCOTT. Jim, did you say it should be legal on the national 

basis, or illegal? 

Mr. LEACH. No, no. Illegal. 

Mr. SCOTT. Illegal? 

7

Mr. LEACH. Illegal. I’m sorry. I’m reading a little too quickly. I 

apologize. 

Mr. SCOTT. No, I’m just listening too slowly. 

Mr. LEACH. While it’s true that one can have more formalized 

prohibitions—and I would certainly favor them—it is not necessarily the case that it is easy to get Congress to adopt bigger 

steps, so this bill is designed to accept the law, whatever this Committee determines to be, and then, using the Banking Committee’s 

jurisdiction, come up with an approach which is basically functional regulation or a functional deterrent to whatever laws this 

Committee determines are appropriate. 

I would simply stress that this is a functional ban. It is partly 

working today because, voluntarily, several of the major credit card 

companies have taken this direction as their own practice. We have 

already seen the Bear Stearns report that about half the Internet 

gambling profits have been reduced, and a number of companies 

are seeing some difficulties based on certain voluntary steps in this 

direction. So an assertion that there is no effectiveness defies the 

current partial steps that are being taken in the private sector. 

In conclusion, let me stress that at a personal level I am a skeptic about all forms of gambling. But each of us are obligated to the 

maximum extent possible to be respectful of legitimate choices 

made by others. Casino gambling, as it exists in America, is at 

least regulated by the State to protect the participants. Generally, 

casinos also add entertainment and involve elements of socialization. 

Gambling alone, on the other hand, whether using a laptop at 

home or a computer in the workplace, involves no entertainment or 

socialization element, and lacks the fundamental protections of law 

and regulation. Casino gambling, as it has been sanctioned in all 

Western democracies, has only been allowed to exist with comprehensive regulation. Internet gambling lacks such safeguards. It 

is a danger to the family and society at large. It should be ended. 

From a family perspective, the home may be considered a castle, 

but it should never be a casino. 

Thank you all very much. 

[The prepared statement of Mr. Leach follows:]

PREPARED STATEMENT OF THE HONORABLE JAMES A. LEACH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF IOWA

Mr. Chairman, thank you for holding this hearing on legislation addressing the 

epidemic problem of Internet gambling. Your leadership on this issue is deeply appreciated. 

As I testified previously, gambling on the Internet is fast becoming one of the 

most critical issues confronting thousands of American families and the social and 

economic implications of Internet gambling can no longer be ignored. The ramifications of Internet gambling are now showing themselves on college campuses and 

even professional athletes have admitted addiction. Approximately 15 million Americans are at-risk or problem gamblers, who are more likely to have drug addictions, 

alcohol dependency, serious family dysfunction, and, at the extreme, especially when 

gambling losses accumulate, a higher rate of suicide. 

The financial and economic implications of Internet gambling may not be intuitive 

to those unfamiliar with the workings of the industry, but the consequences cannot 

be exaggerated. 

It simply is not good for the economy at large to have Americans send billions 

to overseas Internet casinos which often have shady or unknown owners. 

Casino gambling, while it competes for jobs with other sectors of the economy, 

such as restaurants and the retail trade, also partly balances job losses elsewhere 

8

with some job creation. Internet gambling, on the other hand, may be the only sector of the economy where the case of greater efficiency is not altogether compelling. 

It reduces jobs in competing parts of the American economy, but creates few in itself 

and all, to date, are abroad. In other words, this is a ‘‘jobs’’ as well as a moral and 

regulatory issue. 

The very characteristics that make the Internet such a valuable resource are also 

the reasons why it has such a huge potential to impinge on the stability of American 

financial institutions, as well as the American family. The easy access, anonymity, 

and speed of transactions which make such positive contributions to the level of efficiency and cost of financial services also make routine safeguards impractical and 

leave the financial services industry open to abuse. Internet gambling increases consumer debt, makes bankruptcy more likely, money laundering an easy endeavor, 

and identity theft a likely burden. 

Gambling in general and Internet gambling in particular provide one of the most 

accessible platforms for money laundering. Money launderers tend to seek out areas 

where there is a low risk of detection by law enforcement. Internet gambling is a 

particularly attractive method to launder money because of the heightened level of 

anonymity and a virtual lack of governmental regulation. Nearly 80 percent of the 

$10 billion in revenue generated by Internet gambling sites is impossible to account 

for, since most operators are located in the Caribbean and other jurisdiction with 

loose regulatory structures and limited financial reporting requirements. 

Reports from the OECD’s Financial Action Task Force specifically point to Internet gambling as a major loophole in anti-money laundering regimes. The U.S. Treasury’s Financial Crimes Enforcement Network has a special anti-money laundering 

program designed for the traditional domestic gaming industry. No such strategy exists for illegal gambling sites located in unregulated offshore jurisdictions. Given the 

hard work of this Committee, and also that of the Financial Services Committee, 

to quash the money laundering efforts of terrorists and narco-traffickers, it would 

be irresponsible to leave such an enormous institutional loop-hole unplugged. 

Suggestions to legalize and regulate Internet gambling address none of these concerns. No Internet gambling site will subject themselves to taxation and the cost of 

regulation when they can remain offshore. And no regulatory system can prevent 

the social and economic ramifications of online gambling. This was the conclusion 

of the National Gambling Impact Study Commission Report issued in 1999. This 

congressionally mandated report concluded that Internet gambling should be illegal 

at the federal level and suggested prohibiting the use of financial instruments for 

these transactions, thus serving as a model for this legislation. 

In conclusion, let me stress that at a personal level I am a skeptic about all forms 

of gambling, but each of us are obligated to the maximum extent possible to be respectful of legitimate choices made by others. Casino gambling as it exists in America is, at least, regulated by the State to protect the participants. Generally, casinos 

also add entertainment and involve elements of socialization. Gambling alone, on 

the other hand, whether using a laptop at home or a computer in the workplace, 

involves no entertainment or socialization element and lacks the fundamental protections of law and regulation. Casino gambling as it has been sanctioned in all 

Western democracies has only been allowed to exist with comprehensive regulation. 

Internet gambling lacks such safeguards. It is a danger to the family and society 

at large. It should be ended. 

From a family perspective, the home may be considered a castle; but it should 

never be a casino. 

Thank you.

Mr. COBLE. Thank you, Mr. Leach. 

We have been joined by the gentleman from Florida, Mr. Feeney, 

and Mr. Chabot, the gentleman from Ohio. 

Mr. Malcolm. 

STATEMENT OF JOHN G. MALCOLM, DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT 

OF JUSTICE 

Mr. MALCOLM. Mr. Chairman, Members of the Subcommittee, 

thank you for inviting me to testify today. The issue before the 

Subcommittee is one of singular importance and I commend the 

Subcommittee for holding this hearing. 

9

I would also like to commend Congressman Leach, as well as 

Congressman Goodlatte and Senator Kyl, for their tireless efforts 

and longstanding commitment to provide law enforcement with additional tools to combat Internet gambling. Today, I am pleased to 

offer the views of the Department of Justice about Internet gambling. 

As you all know, the number of Internet gambling sites has increased substantially in recent years. While there were approximately 700 Internet gambling sites in 1999, it is estimated that, by 

the end of 2003, there will be approximately 1,800 such sites, generating between $4.2 and $4.3 billion. In addition to online casinostyle gambling sites, there are numerous offshore sports book operations that take bets both over the Internet and via the telephone. 

These developments are of great concern to the United States Department of Justice because of the potential for fraud, the opportunities they create for money launderers and organized criminal organizations, and the problems of gambling by minors and by compulsive gamblers, which are exacerbated by Internet gambling. I 

discuss each of these issues in greater detail in my written testimony. 

Additionally, most of these gambling businesses operate offshore 

in foreign jurisdictions. Many of them accept bets from United 

States citizens, which is a violation of several Federal laws, including sections 1084, 1952 and 1955 of title 18, United States Code. 

The Department of Justice generally supports the efforts of the 

drafters of H.R. 21, to enable law enforcement to cut off the transfer of funds to and from illegal Internet gambling businesses. 

With respect to H.R. 1223, the Department has concerns about 

the feasibility and desirability of regulating Internet gambling. I 

have more extensive comments on H.R. 21 and H.R. 1223 in my 

written testimony. Of course, I am happy to answer any questions 

you may have about those bills. 

Before concluding, I would just like to thank you again for inviting me to testify today. The Justice Department also thanks you 

for your support over the years, and we reaffirm our commitment 

to work with Congress to address the significant issue of Internet 

gambling. 

Thank you. 

[The prepared statement of Mr. Malcolm follows:]

PREPARED STATEMENT OF JOHN G. MALCOLM

Mr. Chairman and Members of the Subcommittee: 

Thank you for inviting me to testify today. The issue before this Subcommittee 

is one of singular importance, and I commend the Subcommittee for holding this 

hearing. I would also like to commend Congressman Leach, as well as Congressman 

Goodlatte and Senator Kyl, for their tireless efforts and longstanding commitment 

to provide law enforcement with additional tools to combat Internet gambling. 

Today I am pleased to offer the views of the Department of Justice about Internet 

gambling, including the potential for gambling by minors and compulsive gamblers, 

the potential for fraud and money laundering, the potential for infiltration by organized crime, and recent state actions. The Department of Justice generally supports 

the efforts of the drafters of H.R. 21 and S. 627 to enable law enforcement to cut 

off the transfer of funds to and from illegal Internet gambling businesses. With respect to H.R. 1223, the Department has concerns, which I shall address below, about 

the feasibility and desirability of regulating Internet gambling. 

As you all know, the number of Internet gambling sites has increased substantially in recent years. While there were approximately 700 Internet gambling sites 

10

in 1999, it is estimated that by the end of 2003, there will be approximately 1,800 

such sites generating around $4.2 billion. In addition to on-line casino-style gambling sites, there are numerous off-shore sports books operations that take bets both 

over the Internet and via the telephone. These developments are of great concern 

to the United States Department of Justice, particularly because many of these operations are currently accepting bets from United States citizens, when it is illegal 

to do so. 

The Internet and other emerging technologies, such as interactive television, have 

made possible types of gambling that were not feasible a few years ago. For example, a United States citizen can now, from his or her home at any hour of the day 

or night, participate in an interactive Internet poker game operated by a computer 

located in the Caribbean. Indeed, a tech-savvy gambler can route his bets through 

computers located in other countries, thereby obscuring the fact that he is placing 

his bet from the United States. 

GAMBLING BY MINORS

On-line gambling also makes it far more difficult to prevent minors from gambling. Unlike traditional physical casinos and Off-Track-Betting parlors, the operators of gambling websites cannot look at their customers to assess their age and request photo identification. Currently, Internet gambling businesses have no reliable 

way of confirming that gamblers on their website are not minors who have gained 

access to a credit card. Although some companies are developing software to try to 

detect whether a player is old enough to gamble or whether that player is from a 

legal jurisdiction, such software has not been perfected and would, of course, be subject to the same types of flaws and vulnerabilities that could be exploited by hackers. 

COMPULSIVE GAMBLING

Unlike on-site gambling, on-line gambling is readily available to anyone with an 

Internet connection at all hours of the day or night. This presents a particular danger for compulsive gamblers. As was recently pointed out by the American Psychiatric Society: ‘‘Internet gambling, unlike many other forms of gambling activity, 

is a solitary activity, which makes it even more dangerous; people can gamble uninterrupted and undetected for unlimited periods of time.’’ Indeed, the problems associated with pathological and problem gamblers, a frighteningly-large percentage of 

which are young people, are well-established and can be measured in the ruined 

lives of both the gamblers themselves and their families. 

POTENTIAL FOR FRAUD

Although there are certainly legitimate companies that either are operating or 

want to operate on-line casinos in an honest manner, the potential for fraud connected with casinos and bookmaking operations in the virtual world is far greater 

than in the physical realm. On-line casinos and bookmaking establishments operate 

in many countries where effective regulation and law enforcement is minimal or 

non-existent. Start-up costs are relatively low, and cheap servers and unsophisticated software are readily-available. Like scam telemarketing operations, on-line 

gambling establishments appear and disappear with regularity, collecting from losers and not paying winners, and with little fear of being apprehended and prosecuted. 

Through slight alterations of the software, unscrupulous gambling operations can 

manipulate the odds in their favor, make unauthorized credit card charges to the 

accounts of unsuspecting gamblers, or alter their own accounts to skim money. 

There is also a danger that hackers can manipulate the online games in their favor 

or can steal credit card or other information about other gamblers using the site. 

POTENTIAL FOR ORGANIZED CRIME

Additionally, the Department of Justice is concerned about the potential involvement of organized crime in Internet gambling. Traditionally, gambling has been one 

of the staple activities in which organized crime has been involved, and many indictments brought against organized crime members have included gambling charges. 

We have now seen evidence that organized crime is moving into Internet gambling. 

INTERNET GAMBLING VIOLATES FEDERAL LAW

Most of these gambling businesses operate offshore in foreign jurisdictions. If they 

are accepting bets or wagers from customers located in the United States, then 

these businesses are violating federal laws, including Sections 1084, 1952, and 1955 

11

of Title 18, United States Code. While the United States can indict these companies 

or the individuals operating these companies, it may be difficult to bring them to 

trial in the United States. 

MONEY LAUNDERING AND INTERNET GAMBLING

Another major concern that the Department of Justice has about on-line gambling 

is that such businesses provide criminals with an easy and excellent vehicle for 

money laundering. This is due in large part to the cash-intensive nature of the industry, the fact that most Internet gambling sites are located offshore, and the volume, speed, and international reach of Internet transactions. 

It is a fact that money launderers have to go to financial institutions to conceal 

their illegal funds and to recycle those funds back into the economy for their use. 

Because criminals are well aware of the fact that banks are now subject to greater 

scrutiny and regulation, they have—not surprisingly—turned to other non-bank financial institutions to launder their money. On-line casinos are a particularly inviting target because, in addition to using the gambling that on-line casinos offer as 

a way to hide or transfer money, on-line casinos offer a broad array of financial 

services to their customers, such as providing credit accounts, fund transmittal services, check cashing services, and currency exchange services. 

Individuals wanting to launder ill-gotten gains through an on-line casino can do 

so in a variety of ways. For example, a customer could establish an account with 

a casino using illegally-derived proceeds, conduct a minimal amount of betting or 

engage in offsetting bets with an overseas confederate, and then request repayment 

from the casino, thereby providing a new ‘‘source’’ of the funds. If a gambler wants 

to transfer money to an inside source in the casino, who may be located in another 

country, he can just play until he loses the requisite amount. Similarly, if an insider 

wants to transfer money to the gambler, perhaps as payment for some illicit activity, he can rig the game so the bettor wins. 

The anonymous nature of the Internet and the use of encryption make it difficult 

to trace the transactions. Further, the gambling business may not maintain the 

transaction records, in which case tracing may be impossible. While regulators in 

the United States can visit physical casinos, observe their operations, and examine 

their books and records to ensure compliance with regulations, this is far more difficult, if not impossible, with virtual casinos. 

COMMENTS ON H.R. 1223

If enacted, H.R. 1223 would establish a Commission to study the existing legal 

framework governing Internet gambling and the issues involved with the licensing 

and regulation of Internet gambling. Among the topics to be studied, the Commission would review existing law, assess the impact of Internet gambling on problem 

gamblers and minors, assess the susceptibility of Internet gambling to money laundering, and study the potential of regulatory measures to minimize any adverse 

problems. As I previously stated, the Department has concerns about these and 

other issues as they relate to Internet gambling. At this time, the Department believes that Internet gambling should be prohibited for many of the reasons I have 

mentioned, as well as others cited by the Congressionally-created National Gambling Impact Study Commission in its 1999 Report recommending that Internet 

gambling be prohibited. Moreover, given differences in state law on the issue of 

gambling in general, and given the fact that Internet gamblers could come from any 

state, the Department also has concerns that such regulation would need to ensure 

that the laws of all states were taken into consideration when analyzing this issue. 

While the Department would not necessarily oppose per se a Commission that 

would revisit these issues and make recommendations on the feasibility of regulating Internet gambling, H.R. 1223 provides that this Commission shall issue proposed changes to Federal law and regulations to provide for the licensing and regulation of Internet gambling in the United States. This requirement appears to preordain the outcome of the Commission’s study and not permit this Commission to 

reach the same conclusion that the National Gambling Impact Study Commission 

reached just four years ago, to wit, that Internet gambling be prohibited and not 

regulated. 

Our review of H.R. 1223 is continuing, and we may have additional comments at 

a later date. But if Congress elects to consider legislation, such as H.R. 1223, that 

could, in theory, eventually lead to the legalization of Internet gambling, it will be 

very important to bear in mind and emphasize the debilitating and potentially disastrous consequences of such a step that I noted previously—namely, the problems 

of underage gambling, addictive gambling, and fraud, as well as the possibility of 

organized crime involvement. 

12

Even if H.R. 1223 is enacted, that should not preclude action on H.R. 21 and S. 

627, since these bills apply only to ‘‘unlawful Internet gambling’’ and would not be 

applicable to lawful Internet gambling. Given that illegal gambling exists in the 

physical world despite the availability of legalized forms of gambling in many states, 

there is every reason to believe that unlawful gambling would continue to exist in 

the cyber world even if the United States were to regulate Internet gambling. 

COMMENTS ON H.R. 21

The Department has several comments on H.R. 21. First, the Justice Department 

believes that H.R. 21 should apply to all means of wagering that derive from the 

Internet. Many offshore sports books accept wagers both over the telephone and 

over the Internet. As drafted, H.R. 21 is only applicable to Internet gambling, so 

an otherwise illegal site could avoid the bill’s prohibitions by directing that wagers 

be placed over the phone rather than via the Internet. The bill should apply to all 

unlawful Internet gambling regardless of the communications medium being used 

to place bets. 

Second, the Justice Department opposes provisions of H.R. 21 that weaken or 

alter existing federal law or standards. The Justice Department recognizes the important role that federal regulators play in regulating federally-insured financial institutions and is currently discussing with the Treasury Department procedures 

whereby injunctive relief would only be sought in full coordination with the appropriate federal financial regulator. Nonetheless, the Justice Department believes that 

Rule 65 of the Federal Rules of Civil Procedure should be the sole standard used 

by courts in considering whether to grant injunctive relief. Section 3(c)(5)(B) of H.R. 

21 sets forth additional factors that the district court must consider in determining 

whether to grant injunctive relief against certain entities, including credit card 

issuers and financial institutions. Rule 65 is the well-established standard used in 

federal courts throughout the country in all cases in which a party is seeking injunctive relief, and the Department opposes any attempt to alter existing federal standards for the benefit of specific entities. Moreover, the Department believes that, 

under a standard Rule 65 analysis, a district court would already have the discretion to consider the listed factors. 

For the same reason, the Justice Department opposes Section 3(c)(4)(B) of H.R. 

21, which provides, in essence, that interactive service providers that are not liable 

under H.R. 21 shall not be liable under Section 1084 of Title 18, United States Code, 

unless the ISP has actual knowledge of the bets and wagers and owns, controls, 

operates, manages, supervises, or directs a website at which unlawful bets or wagers are offered, placed, or received. This provision constructively amends Section 

1084, an existing federal criminal statute, and weakens its application by imposing 

a far higher standard of liability than traditional aiding and abetting liability, which 

applies to everyone else who must comply with the law. While the Department does 

not believe that ISPs should be singled out for particularly harsh treatment (and 

our ‘‘track record’’ bears this out), we do not believe that ISPs should be singled out 

for uniquely favorable treatment either. 

Third, the Justice Department has other concerns about how the bill treats ISPs, 

particularly as it pertains to the removal of Internet gambling websites and the cessation of ancillary services connected to those sites. We are, however, working diligently with representatives from several prominent interactive service providers. 

CONCLUSION

On behalf of the Department of Justice, I want to thank you again for inviting 

me to testify today. We thank you for your support over the years and reaffirm our 

commitment to work with Congress to address the significant issue of Internet gambling. I will be happy to answer any questions that you might have.

Mr. COBLE. Mr. Malcolm, your eyes weren’t even close to being 

fixated. You finished well ahead of the red light and I commend 

you for that. 

We have been joined by the gentlelady from Texas, Miss Jackson 

Lee. It’s good to have you with us, Sheila. 

Thank you, Mr. Malcolm. 

Mr. Modisett, am I pronouncing your surname correctly? 

Mr. MODISETT. You are, thank you. 

Mr. COBLE. It’s good to have you with us, Mr. Modisett. 

13

STATEMENT OF JEFFREY MODISETT, COUNSEL, BRYAN CAVE, 

LLP, AND FORMER ATTORNEY GENERAL, STATE OF INDIANA 

Mr. MODISETT. Thanks very much. 

Mr. Chairman and Members of the Committee, thank you for the 

opportunity to testify today on this complex issue. 

I have come to this issue today with both a law enforcement and 

technology background. As you noted, I have been a Federal prosecutor, a D.A., a State attorney general, but I have also worked in 

Silicon Valley and currently represent some high tech clients. The 

views I express today are my own. 

As Indiana Attorney General, I issued an official opinion on 

Internet gaming. In that opinion, I wrote that, under Indiana law, 

only gambling that is specifically authorized by statute is legal. 

Since there are no references to Internet gaming in the Indiana 

code, it’s not legal. 

But the question of whether the Federal Government should 

proactively attempt to prohibit all Internet gaming preemptively is 

a different question. My experience convinces me that the best 

antidote to an unregulated, offshore Internet gambling industry is 

a fully licensed, highly regulated, onshore Internet gambling industry based on strict American standards and priorities. I would further suggest that the enforcement mechanism proposed in H.R. 21, 

while well intended, is likely to be ineffective, counter-productive, 

and prone to unintended consequences. 

H.R. 21 seeks to have the financial institutions operating in 

America prevent Americans from using financial instruments to 

place online wagers. I’m aware that one of the ostensible reasons 

for this effort is the fear that Internet gambling will provide an avenue for money laundering. Frankly, I find this assertion strange, 

given that the majority of Internet wagers are placed by credit 

cards, and credit card transactions are almost always transparent. 

I don’t believe that H.R. 21 will stop Americans from gambling 

on the Internet. I do believe it will change the manner in which 

they do so. If Internet gamblers cannot use their credit cards, many 

and perhaps most of them will instead opt for e-cash accounts, electronic fund transfers, wire transfers to accounts at offshore banks, 

and other less visible means to settle their accounts. 

It is impossible to predict, but none of the foregoing financial 

transactions are particularly difficult to execute. The added inconvenience might stop a few people who are rare or occasional bettors, but it won’t stop experienced gamblers, including problem 

gamblers. 

What the legislation will do, however, is potentially worsen the 

very problem it sets out to solve. To the extent that there’s a potential for money laundering in the Internet gaming space—and the 

financial industry itself believes that this potential is small, according to the GAO—creating a market for less transparent payment 

solutions will presumably make illicit activities, including money 

laundering, substantially worse. Creating a market for blind e-cash 

is not the way to stop money laundering. The way to stop it is to 

make sure Internet gaming takes place in highly regulated, supervisory regimes. 

I don’t want American financial institutions to act as our police 

on the Internet. They will err on the side of over-inclusion and proVerDate 0ct 09 2002 13:45 Jul 07, 2003 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6601 G:\WORK\CRIME\042903A\86705.000 HJUD1 PsN: DOUGA
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hibit legal transactions out of an overabundance of caution, as they 

already have. We have not regulated Internet activity so directly 

before now, and now, at a time when the current law is unsettled, 

is not the time to begin. 

Admittedly, the commission envisioned by H.R. 1223 would have 

a difficult job, but if it’s achieved, the results would solve many of 

the problems that the prohibitionists sincerely want to solve. In a 

licensed environment, it is possible to verify identity online, using 

pin numbers and out-of-session contacts. This and other technology 

could be used to help ensure no minors gamble on the Internet. 

Because all Internet gaming transactions are recorded, it is actually easier to track problem gamblers in the cyber world than in 

the bricks and mortar casino. Self-exclusion and preset loss limits 

are more easily accomplished. 

Another benefit would be economic. Instead of flowing offshore, 

the money wagered on the Internet would remain in the U.S. and 

help build the economies of the regulating States. 

Mr. Chairman, when Evan Bayh became Governor of Indiana, he 

did not support gambling, but the people spoke and voted for a repeal of our constitutional ban on gambling. Governor Bayh concluded that if gambling was to be legal in Indiana, he would appoint people of unquestionable integrity and with law enforcement 

background to head up the regulatory effort. It worked. The Federal Government should also acknowledge now that Internet gaming will continue to grow in America, and we should appoint tough, 

fair-minded people with integrity to develop model approaches and 

help establish international standards for Internet gaming regulation. 

In summary, Mr. Chairman, I don’t believe the choice before the 

Subcommittee is whether or not there will be Internet gambling in 

the U.S. There will be. The question is what sort of Internet gambling there will be. Under H.R. 21, it will be an unlicensed, unregulated industry, where the Federal and State governments afford no 

protection, and with no economic benefit or tax revenue accruing 

to the U.S. 

Under H.R. 1223, there is the potential for a tightly regulated industry, overseen by Americans of integrity, bolstered by laws and 

regulations that provide substantial protections for minors and 

problem gamblers, remove the potential for money laundering, and 

provide economic benefit and tax revenue in the U.S. 

Once again, thank you for the opportunity to testify. I look forward to the questions. 

[The prepared statement of Mr. Modisett follows:]

PREPARED STATEMENT OF JEFFREY A. MODISETT

Mr. Chairman and members of the Committee, let me begin by thanking you for 

the opportunity to testify today on this complex issue. 

It is difficult to discuss my opinion on the topics at issue today without putting 

it in the context of my personal experience and so, with your permission, I would 

like to briefly mention the more relevant part of my background. 

Upon graduation from Yale Law School and following a clerkship with a federal 

judge, I began my career as an Assistant U.S. Attorney in Los Angeles. In time, I 

became the Deputy Chief of the Public Corruption and Government Fraud Unit, specializing in the prosecution of violations of the U.S. Export Control laws. In 1988, 

I returned to my home state of Indiana to work for Evan Bayh (now Senator Bayh), 

first on his successful gubernatorial campaign and then as his Executive Assistant 

15

for Public Safety. In this capacity, I served as Governor Bayh’s liaison to the State 

Police, Department of Correction, and National Guard, as well as headed up the 

state’s efforts in the war on drugs. In 1990, I was elected Prosecuting Attorney for 

Marion County, Indiana, which is the City of Indianapolis. In 1996, I was elected 

state attorney general. 

As attorney general, I issued official opinions, including one on Internet gaming. 

That Official Opinion, by the way, concluded that Internet gaming is illegal in Indiana. At the Governor’s request, I also chaired the state’s Gambling Impact Study 

Commission. The Commission met for two years and issued a lengthy report in December 1999. 

Today, the committee has before it two bills, H.R. 21 and H.R. 1223, which pursue 

two very different approaches to Internet gambling. To oversimplify, H.R. 21 seeks 

to enforce a prohibition on Internet gambling, while H.R. 1223 seeks to create a 

commission to determine how states and the federal government might work together to license and regulate Internet gaming. Personally, I believe that H.R. 21 

has great surface appeal, especially (of course) for those who oppose gambling in all 

forms. However, it is my opinion that H.R. 1223 is the preferable approach; the reasons for this will be the focus of my testimony. 

Internet gambling raises many thorny issues. There are the social, fiscal, and economic impacts of all legalized gambling—which were the focus of our two-year study 

in Indiana. There is a question of political philosophy, that is, how much should the 

government do to protect people from themselves, and to what extent the freedoms 

of the many should be restricted to protect the vulnerabilities of the few. There is 

the perplexing question of how to apply the varying state and federal laws and regulations to transactions that are trans-jurisdictional by their very nature. Finally, 

there are more nuanced questions about the differences among sportsbook, casinostyle, lottery, pari-mutuel and other forms of gaming, and how the law should treat 

each of these. 

In dealing with all of these things, there are a few points upon which I believe 

we all agree. I believe we all seek to minimize the adverse consequences that can 

accompany gambling—we must do all we can to prevent gambling by minors, we 

must be vigilant to identify pathological gambling and have the tools and resources 

for dealing with it when we find it, and we must investigate the potential for money 

laundering. I also think we all agree that most Americans today have the option 

to gamble if they so choose—only three states prohibit all gambling, and even in 

those states, illegal gambling is an option. There is no legal sports betting outside 

of Nevada, and yet there is plenty of sports betting across the country. And, I think 

we can all agree that Americans who want to gamble on the Internet are almost 

certainly going to be able to do so—they can today, and they will be able to do so 

in the future. Unless the federal government wants to take draconian steps that 

would adversely affect both the Internet and personal privacy, people who want to 

bet on the Internet will be able to do so. 

As I mentioned earlier, as Indiana Attorney General, I issued an Official Opinion, 

which still has precedential authority in Indiana. In that Opinion, I wrote that 

under Indiana law only gambling that is specifically authorized by statute is legal. 

Since there are no references to Internet gaming in the Indiana Code, it is not 

legal—even though gambling on riverboats, on horse races, and by lotteries are explicitly permitted in some fashion. I also warned in that Opinion that many Hoosiers were likely gambling over the Internet anyway, and that therefore parents especially should be mindful of how easy it is to gamble on-line. This Opinion was 

widely interpreted as calling prospectively for the outright prohibition of gambling 

on the Internet, which was not accurate. As attorney general, I had an obligation 

to advise my constituents on Indiana law as it then existed. But my Opinion, as 

reinforced by my service on the state Gambling Impact Study Commission and other 

experiences, was and is more complicated and nuanced than the position advanced 

by the prohibitionists. 

I submit that the best antidote to an unregulated offshore Internet gambling industry is a fully-licensed, highly-regulated on-shore Internet gambling industry 

based on strict American standards and priorities. I would further suggest that the 

enforcement mechanism proposed in Congressman Leach’s bill—while well-intended—is likely to be ineffective, counter-productive, and prone to unintended consequences. 

PROBLEMS WITH THE LEACH BILL

H.R. 21 seeks to have the financial institutions operating in America prevent 

Americans from using financial instruments to place on-line wagers. It would have 

the Department of the Treasury adopt regulations aimed at blocking such wagers, 

16

and would empower state and local law enforcement to seek injunctions to require 

financial institutions to take additional enforcement steps. 

I am aware that one of the ostensible reasons for this effort is a fear that Internet 

gambling will provide an avenue for money laundering. Frankly, I find this assertion strange, given that the majority of Internet wagers are placed by credit cards, 

and credit card transactions are almost always transparent. I do not believe that 

the Leach bill will stop Americans from gambling on the Internet; however, I do believe it will change the manner in which they do so. 

If Internet gamblers cannot use their credit cards, many (perhaps most) of them 

will instead opt for e-cash accounts, electronic funds transfers, wire transfers to accounts at offshore banks, and other less visible means to settle their accounts. Presumably, the bills’ sponsors proceed from the assumption that added inconvenience 

will dissuade many or most gamblers from betting on-line. It is impossible to predict, but none of the foregoing financial transactions are particularly difficult to execute. The added inconvenience might stop a few people who are rare or only occasional bettors. But it will certainly not stop experienced gamblers, including problem 

gamblers. 

What this legislation will do, however, is potentially worsen the very problem that 

it sets out to solve. To the extent that there is a potential for money laundering 

in the Internet gaming space, creating a market for less transparent payment solutions will presumably make illicit activities, including money laundering, substantially worse. The obvious response to the Leach bill by the offshore industry will be 

to create payment solutions that U.S. law enforcement and U.S. banks cannot easily 

‘‘see’’—that is, their transactions will be harder to trace. Creating a market for blind 

e-cash is not the way to stop money laundering. 

SOLUTIONS IN THE CONYERS BILL

Admittedly, the commission envisioned by H.R. 1223 would have a difficult job. 

The members would have to determine how best to preserve state prerogatives in 

an Interstate medium. They would have to provide guidance on which regulations 

will keep minors and pathological gamblers from betting on-line, at least affording 

the same level of protections as exist in land-based casinos. The would have to recommend means to protect against money laundering. They would have to ensure the 

fairness of games and ensure that winnings are paid out. Finally, they would have 

to figure out how to appropriately tax the proceeds of Internet wagers. 

But if this is achieved, the results would solve many of the problems that the prohibitionists sincerely want to solve. In a licensed environment, it is possible to verify 

identity on-line using PIN numbers and out-of-session contacts. This and other technology could be used to help ensure no minors gamble on the Internet. Because all 

Internet gaming transactions are recorded, it is actually easier to track problem 

gamblers in the cyberworld than in a brick-and-mortar casino. Self-exclusion and 

pre-set loss limits are more easily accomplished. 

Another benefit would be economic—instead of flowing offshore, the money wagered on the Internet would remain in the U.S. and help build the economies of the 

regulating states. One may oppose gambling for various reasons, but it is undeniable that local economies have benefited from gambling and state and local governments have gained revenues from it. States could also collect taxes on Internet gambling that they are losing today (from both casinos and bettors); this would help 

with the substantial budget shortfalls most states now face. I would not propose 

Internet gaming as a way of fixing state deficits, but I would suggest that the revenue generated from American bettors in cyberspace should help the United States 

and not Netherland Antilles or the Grand Cayman Islands. 

I should be clear: I most certainly am not an advocate of H.R. 1223 for economic 

reasons. I think there are better ways for government to improve people’s lives economically. But I do think it is short-sighted to think that we can have any significant impact on such a huge industry as Internet gaming by convincing ourselves 

that we can stop offshore cybergaming at the border. Instead, and most importantly, 

we should minimize and marginalize the offshore Internet gaming industry by developing a fully-licensed, highly-regulated industry in the U.S. We should use the 

marketplace to ‘‘suck all of the oxygen’’ out of the offshore industry. U.S. customers 

prefer U.S. brands and U.S. companies would quickly dominate the market. In 

terms of the U.S. market, much of the offshore industry would probably give up entirely and shift their focus from the U.S. to other countries where they might have 

a better chance of competing successfully. In the meantime, U.S. companies would 

set the standard for fairness and honesty because they would be operating under 

a fully transparent regulatory regime. 

17

In fact, dozens of countries have already begun the process of licensing and regulating Internet gambling—most notably the United Kingdom. The U.K.’s licensing 

and regulation regime will be complete soon, and Australia, Denmark and other 

countries have legalized it as well. We can benefit from their learning process and 

improve upon it. 

Mr. Chairman, when Evan Bayh became Governor of Indiana in 1989, he did not 

support gambling, but the people spoke and voted for a repeal of our Constitutional 

ban on gambling. Soon, lawmakers passed a state lottery followed by riverboat gambling. Governor Bayh concluded that if gambling was to be legal in Indiana, he 

would appoint people of unquestionable integrity to head up the regulatory effort. 

He appointed a federal prosecutor as the Executive Director of the state gaming 

commission and the commission passed tough regulations and made clear from the 

outset that tough enforcement would be used against any law violators. As a result, 

we had a remarkably clean operation from Day One. The federal government should 

also acknowledge now that Internet gaming will continue to grow in America and 

we should appoint tough, fair-minded people with integrity to develop model approaches and help establish international standards for Internet gaming regulation. 

In summary, I do not believe that the choice before this subcommittee is whether 

or not there will be Internet gambling in the U.S.—there most certainly will be. The 

question is what sort of Internet gambling there will be. Under H.R. 21, it will be 

an unlicensed, unregulated industry where the federal and state governments afford 

no protection to players, to minors or to problem gamblers, and it will be funded 

by less-than-transparent transactions, with no economic benefit or tax revenue accruing to the U.S. Under H.R. 1223, there is the potential for a tightly-regulated 

industry overseen by Americans of integrity bolstered by laws and regulations that 

provide substantial protections for minors and problem gamblers, remove any potential for money laundering, and provide economic benefit and tax revenue in the 

United States. 

Once again, I thank you for the opportunity to testify, and I look forward to the 

question and answer session.

Mr. COBLE. Thank you, Mr. Modisett. I appreciate that. 

Mr. Hornbuckle. 

STATEMENT OF WILLIAM J. HORNBUCKLE, PRESIDENT AND 

CHIEF OPERATING OFFICER, MGM MIRAGE ONLINE 

Mr. HORNBUCKLE. Thank you, Mr. Chairman. 

Mr. Chairman, distinguished Members of the Committee, thank 

you for inviting me today to testify about the MGM MIRAGE position on Internet gaming. 

I am Bill Hornbuckle, President and Chief Operating Officer of 

MGM MIRAGE Online, a wholly owned subsidiary of MGM MIRAGE, with head offices in the Isle of Man and Las Vegas, NV. 

MGM MIRAGE is one of the world’s leading and most respected 

entertainment, hotel, and gaming companies that owns and operates 15 casino resorts located in Nevada, Mississippi, and Michigan. We employ more than 43,000 men and women, we manage 

$10 billion in assets, and generate over $4 billion in revenue annually. 

Since all of our casinos operate under privileged gaming licenses, 

we clearly understood what was at stake for our company and the 

industry when we decided to pursue online gaming and seek the 

appropriate licensing. In September of 2001, MGM MIRAGE was 

awarded one of three online gaming licenses from the Isle of Man. 

Our site went live in September of 2002 and has been accepting 

wagers from a small number of Western European countries. 

I am here to testify today in opposition of H.R. 21. Given the 

need to be brief, and the extensive nature of this subject, I have 

made an additional submission of supplemental material that cover 

the interactive gaming market, operations, regulations, and antimoney laundering code that govern our activity. While this mateVerDate 0ct 09 2002 13:45 Jul 07, 2003 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6601 G:\WORK\CRIME\042903A\86705.000 HJUD1 PsN: DOUGA
18

rial is voluminous—and I do apologize for that—I thought it important to share with all stakeholders before any legislation was 

passed. 

My message today centers around the following three basic premises: 

Premise one. H.R. 21 will not stop Internet gaming in the United 

States. We strongly suggest that prohibition in the United States 

has a long list of failures associated with it. Any attempt of prohibiting activity on the Internet, gaming or otherwise, will unfortunately suffer a similar fate. We see this activity as ubiquitous and 

impossible to control from an end-user perspective, with long-term 

attempts to do so as futile. 

The commercial reality in the United States is that every major 

financial institution has ceased taking credit and debit card transactions for online gaming. Despite the banking industry’s preemptive move last spring, the recent General Accounting Office report 

stated that the online gaming industry would grow to $4.2 billion 

in 2003, at a growth rate of 20 percent. Nothing proposed in H.R. 

21 will stop that growth. This bill will have limited impact on a 

very resilient industry. 

Bets from America are prohibited on the MGM MIRAGE site; 

yet, without any promotion, more than 60 percent of all registration attempts are from U.S. citizens, none of which have made it 

through our rigorous player protection system. America is playing 

online. They are now simply doing it offshore in unregulated markets. 

Premise number two: the law of unintended consequences of H.R. 

21 is in direct contrast with the things it seeks to stop. The bill 

would push offshore all regulatory and probity issues of a product 

that is a click away from 110 million Internet users in America. 

H.R. 21 will do nothing to protect these consumers. 

State gaming regulatory bodies and Federal law enforcement 

agencies, which have been effective in the past in controlling gaming, will be prevented from regulating an activity that remains a 

click away. Further, by eliminating all regulated and credible financial institutions, you have encouraged an e-commerce market 

that is ripe for money laundering. 

Premise three: you can properly regulate online gaming. Unlike 

just a couple of years ago, the tools and business methodology exist 

today to effectively regulate this industry. The support material we 

have provided highlights that the four key issues most commonly 

associated with online gaming—jurisdictional control, age 

verification, responsible gaming, and money laundering—can be 

properly administered. 

Although no singular technology solution is perfect, MGM MIRAGE, through our geo-verification module, has been able to leverage database queries on customer location, residence, age and 

fraud detection. After several thousand registration trials and numerous attempts by regulators through State controlled testing 

labs, we believe we have successfully blocked all inquiries from 

nonviable jurisdictions and users who are underage. 

We urge you to consider the merits of H.R. 1223, which calls for 

an Internet Gambling Licensing and Regulatory Study Commission. Only through research and study can sound and effective legVerDate 0ct 09 2002 13:45 Jul 07, 2003 Jkt 000000 PO 00000 Frm 00022 Fmt 6633 Sfmt 6601 G:\WORK\CRIME\042903A\86705.000 HJUD1 PsN: DOUGA
19

islation be drafted, passed and enforced. In order to determine the 

best way to protect the public’s interest, we are strongly suggesting 

that further study needs to be completed on this complex subject 

before any law is enacted upon. 

The public, which clearly enjoys this activity, is deserving of 

proper protections from operators who are held only to the highest 

standards. The debate should not center on how do we prohibit online gaming, but rather, now that online gaming is in American 

homes to stay, how do we effectively regulate and control it. This 

activity simply cannot be legislated away. 

Again, I thank you for allowing me to testify. I would be pleased 

to answer any questions you may have on this matter today or in 

the future. 

[The prepared statement of Mr. Hornbuckle follows:]

PREPARED STATEMENT OF WILLIAM J. HORNBUCKLE

Mr. Chairman, distinguished members of the Committee, thank you for inviting 

me to testify today about the MGM MIRAGE position on Internet gaming. 

I am Bill Hornbuckle, President and Chief Operating Officer of MGM MIRAGE 

Online, a wholly owned subsidiary of MGM MIRAGE, with head offices in the Isle 

of Man and Las Vegas, Nevada. 

MGM MIRAGE is one of the world’s leading and most respected entertainment, 

hotel, and gaming companies that owns and operates 15 casino resorts located in 

Nevada, Mississippi, and Michigan. We employee more than 43,000 men and 

women, manage 10 billion dollars in assets and generate over 4 billion dollars in 

operating revenues annually. 

Since all of our casinos operate under privileged gaming licenses, we clearly understood what was at stake for our company and the industry when we decided to 

pursue online gaming and seek appropriate licensing. In September of 2001, MGM 

MIRAGE was awarded one of the first three online gaming licenses from the Isle 

of Man. Our site went live in September of 2002 and has been accepting wagers 

from a small number of Western European countries. 

I am here to testify today in opposition of H.R. 21. 

Given the need to be brief and the extensive nature of this subject, I have made 

an additional submission of supplemental material that cover the interactive gaming market, operations, regulations, and anti-money laundering code that govern 

our activity. While this material is voluminous, I thought it important to share with 

all stakeholders before any legislation was passed. 

My message today centers around the following three basic premises: 

Premise 1. H.R. 21 will not stop Internet gaming in the United States. 

We strongly suggest that prohibition in the United States has a long list of failures associated with it. Any attempt of prohibiting activity on the Internet, gaming 

or otherwise will unfortunately suffer a similar fate. 

We see this activity as ubiquitous and impossible to control from end-user perspective, with long-term attempts to do so as futile. 

The commercial reality in the United States is that every major financial institution has ceased taking credit and debit card transaction for online gaming. Despite 

the banking industry’s preemptive move last spring, the recent General Accounting 

Office report stated that the online gaming industry would continue to grow to 4.2 

billion dollars in 2003 at a growth rate of 20 percent. 

Nothing proposed in H.R. 21 will stop that growth. This bill will have limited impact on a very resilient industry. 

Bets from America are prohibited on the MGM MIRAGE site, yet without any 

promotion more than 60 percent of all registration attempts are from U.S. citizens. 

America is playing online; they are now simply doing it offshore in unregulated 

markets. 

Premise 2. The law of unintended consequences of H.R. 21 is in direct contrast with 

the things it seeks to stop. 

The bill would push offshore all regulatory and probity issues of a product that 

is a click away from 110 million Internet users in America. H.R. 21 will do nothing 

to protect these consumers. 

20

State gaming regulatory bodies and federal law enforcement agencies, which have 

been effective in the past in controlling gaming will be eliminated from regulating 

an activity that remains a click away. 

Further, by eliminating all regulated and credible financial institutions, you have 

encouraged an e-commerce market that is ripe for money laundering. 

Premise 3. You can properly regulate online gaming. 

The tools and business methodology exist today to regulate this industry. The support material we have provided highlights that the four key issues most commonly 

associated with online gaming; jurisdictional control, age verification, responsible 

gaming, and money laundering can be properly administered. 

Although no singular technology solution is perfect, MGM MIRAGE through our 

geo-verification module has been able to leverage database queries on customer location, residence, age and fraud detection. After several thousand registration trials 

and numerous attempts by regulators through state controlled testing labs, we believe we have successfully blocked all inquiries from non-viable jurisdictions and 

users who are underage. 

We urge you to consider the merits of H.R. 1223, which calls for an Internet Gambling Licensing and Regulatory Study Commission. Only through research and 

study can sound and effective legislation be drafted, passed, and enforced. 

We are strongly suggesting today that further study needs to be completed on this 

complex subject before any law is enacted upon. 

The debate, should not center on how do we prohibit online gaming, but rather 

now that online gaming is in American homes to stay, how do we effectively regulate and control it. 

This activity simply cannot be legislated away. 

Thank you again for allowing me to testify today. I again would encourage you 

to review the material submitted. I would be pleased to answer any questions you 

may have on this matter today or in the future.

Mr. COBLE. Gentlemen, the Members of the Subcommittee thank 

you, express our thanks to each of you, for this contribution. Let 

me start with Mr. Malcolm. 

Mr. Malcolm, some have said that the way H.R. 21 is drafted, it 

could be interpreted as a weakening of the Wire Act. Do you agree 

with this statement (a), and could you give us an example of how 

this could weaken that statute? 

Mr. MALCOLM. Certainly, Mr. Chairman. 

It weakens it in a couple of rather subtle ways. The main one 

perhaps deals with section 3(c)(4)(B) of the bill, which I would contend presents a carve out for Internet service providers for liability 

under section 1084. That section essentially says that before an 

ISP can be held liable under the Wire Act, one must prove a violation of this law and, in addition to that, one would have to prove 

that the ISP not only had knowledge of the bets or wagers being 

placed, but in addition to that, also had to own, operate or control 

the gambling website in question. 

That increases the quantum of proof that the Government would 

have to offer against an ISP under 1084, well above that which 

would be established under an aiding and abetting theory. For example, if an ISP were taking money for advertising for an Internet 

gambling site, clearly connecting supply and demand, with knowledge that that is what they were doing, even if you put the ISP 

on notice, and even though they were clearly facilitating this gambling activity, they would not longer violate 1084. They would say 

well, we have knowledge of the bet or wager, but we don’t own, 

control or supervise the Internet gambling website. Therefore, they 

would be carved out of 1084. 

There are some other brief anomalies dealing with the definitional sections between this section and 1084, but we can deal with 

the staff on that. 

21

Mr. COBLE. All right. Thank you, Mr. Malcolm. 

Mr. Hornbuckle, I have been asked by my colleague from Utah, 

Mr. Cannon, to ask this question that is peculiar to his State of 

Utah. 

Utah law prohibits gambling. Could you technologically prevent 

people in Utah from gambling on the Internet? If so, how would 

you do that? 

Mr. HORNBUCKLE. Mr. Chairman, yes, we could. 

When we went forward with licensing, as you know, we’re privilege licensed in the States I mentioned earlier. Nevada, of note, 

where most of our assets reside, made us commit to and we created 

technology that, if a country has made gambling illegal, or specifically made Internet gambling illegal—and I’ll use the case of 

Japan, where gambling is illegal, and Hong Kong, where Internet 

gambling is illegal—we have put forth in our system through IP 

blocking and other methodologies, which are laid out here, a system that says ‘‘no, you cannot get in’’. It has been 99.9 percent effective in doing that. 

No system is perfect, but we can deliver with reasonable assurance to the Congressman that the folks from Utah, if he didn’t 

want them in, wouldn’t be put in. 

Mr. COBLE. All right. I’ll convey that to him. 

Mr. HORNBUCKLE. Thank you. 

Mr. COBLE. Mr. Leach, we know that you have been involved in 

this issue for a long time. Some believe that Internet gambling 

should be licensed and regulated rather than prohibited, as we 

have heard today. Can you tell us, based upon your years of investigating this issue, whether or not licensing and regulating is a realistic alternative to prohibition, and why? 

Mr. LEACH. Well, certainly you can license and regulate. The 

question is, is it good for the country? Is it good for the individuals 

involved? I think, when you go to the individual, you have this dilemma of do you want to turn the home into a casino, where there 

is virtually no constraints, particularly in people that appear, as 

has been described by the medical profession, in an almost quasigenetic way, where one-and-a-half to 2 percent of Americans, once 

they start to gamble, it’s pretty hard to stop. You have working in 

the home less constraints than you would have in going to an actual casino. I think you would open that problem up rather dramatically. In addition, you keep all the social problems that currently exist, with a single positive of—you have to recognize that 

there is good and bad to almost any proposal, where you would 

probably bring a little more gambling onshore. But if one has real 

doubts about the individual and social implications of Internet 

gambling, then I don’t think that would be a wise way to go. 

I would make one final comment, because it relates to the very 

thoughtful testimony of someone who has a different judgment 

than mine from MGM. When they say there’s no consumer protection, the ultimate consumer protection is that the consumer will 

not have to pay an Internet gambling debt if he cannot use a financial instrument. So the lack of ability of a casino that’s on the 

Internet to take the losses, which are virtually assured over any 

period of time, will protect the American consumer maximally. 

Mr. COBLE. Thank you, sir. I see that my time has expired. 

22

The gentleman from Virginia. 

Mr. SCOTT. I had one technical question. On page 6 of the bill, 

Mr. Malcolm, of H.R. 21, line 15, it says that one of the things it 

exempts is ‘‘any lawful transaction with a business licensed or authorized by a State.’’ Does that exempt lotteries? It’s page 6, line 15. 

Mr. MALCOLM. If I may have just a moment. [Examining.] Absolutely, Mr. Scott. 

Mr. SCOTT. Okay. 

Mr. Malcolm, you indicated that there ar 1,800 sites now. Are 

those 1,800 accessible from the United States that you’re talking 

about? 

Mr. MALCOLM. Well, it’s possible there are a handful of sites, 

such as Mr. Hornbuckle’s site for the MGM MIRAGE, where they 

may be able to successfully block access to the United States. But 

by and large, the Internet is an open territory where one can route 

computer communications through any country. I would think that, 

with a little ingenuity by a tech-savvy person, yep, they would all 

be available. 

Mr. SCOTT. Mr. Hornbuckle, you said you could block out a Utah 

address. If someone calls a long distance number to kind of log in, 

how would you know they were physically in Utah and not in Nevada? 

Mr. HORNBUCKLE. Through IP mapping, through a product we 

use called QUOVA, you can not only identify the origin, you can 

tell if they’re using an anonomizer. It’s a layered weighted system 

that tells you if it’s direct or dial up. 

Based on those indicators and other things that layer into the 

approach we take, in terms of banking institutions, address, voter 

registrar, you know, we go back and check data queries and we can 

determine with reasonable assurance where they’re coming from. 

Mr. SCOTT. You can verify the residence of the name of the person the account is in? 

Mr. HORNBUCKLE. That’s correct. 

Mr. SCOTT. You would have no way of knowing whether or not 

that named person is, in fact, the one doing the gambling? 

Mr. HORNBUCKLE. That’s correct, other than there is a pin code 

that goes back to the customer through the regular mail. To the extent they have that pin code, that’s the identification we have on 

the other end. 

Mr. SCOTT. How do you deal with responsible gaming? 

Mr. HORNBUCKLE. There is a player protection module on our 

site, which I have identified and laid out in great detail in the material we have submitted. It enables a potential customer to go online and limit their stake activity in terms of time, amount wagered, deposits, or withdrawals for that matter. It’s a device that 

enables them to monitor what their own play activity is, as well as 

we can monitor it if we choose to. 

Mr. SCOTT. Mr. Malcolm, are gambling debts enforceable under 

this bill? I know in Virginia, at least the law used to be that you 

couldn’t legally collect a gambling debt. Would this scheme affect 

any of that? 

Mr. MALCOLM. Under H.R. 21, there are civil remedies, including 

the ability to essentially freeze an account to prevent any financial 

23

activity going to and from that operation. If you’re asking as a matter of civil law whether you can collect on a gambling debt, generally one can’t collect on unenforceable or illegal contracts. But, 

you know, that’s not my area of expertise particularly. 

Mr. SCOTT. Mr. Modisett, you indicated ways of evading this H.R. 

21. Could you go into a little more detail about that? You mentioned wire to an offshore bank, escrow accounts, I assume longdistance calls into an Internet provider, and using an access number in Canada would be another way? 

Mr. MODISETT. Yes. Actually, you’re listing all of them there as 

an example, the point being that you want transparency to be able 

to follow these transactions. Credit cards are one of the best ways 

to have that sort of transparency. So when you start closing down 

that aspect of the financial transaction, like the balloon, it’s going 

to spread out into other areas. They will find ways to go ahead and 

gamble. Those other ways that you cited will be less transparent 

and more difficult to follow, and to the extent there is a potential 

for abuse, my concern is that that is going to worsen the problem 

rather than make it better. 

Mr. SCOTT. Mr. Hornbuckle, who regulates your site to make 

sure that the odds that people think they’re playing against are, in 

fact, the odds? 

Mr. HORNBUCKLE. The actual licensing is with the Isle of Man 

government, but we also have made submissions of our license in 

our games to the other jurisdictions that we operate in—Mississippi, Nevada, New Jersey and...I’m missing one. 

Mr. SCOTT. Who gets the tax benefit on the profits? 

Mr. HORNBUCKLE. The Isle of Man government. 

Mr. SCOTT. Does the United States get any benefit from that? 

Mr. HORNBUCKLE. No, they do not, because we do not accept U.S. 

wagers at this time. 

Mr. COBLE. Mr. Hornbuckle, I didn’t hear the last thing you said 

to Mr. Scott. 

Mr. HORNBUCKLE. I’m sorry. No, they do not. He asked if the 

U.S. was any beneficiary from taxes, and the answer is no, nor are 

other jurisdictions, other than the Isle of Man, because we do not 

take U.S. bets at this time. 

Mr. COBLE. Very well. Thank you. 

Mr. Feeney, the gentleman from Florida. Were you through, 

Bobby? 

Mr. SCOTT. Yes, thank you. 

Mr. FEENEY. Thank you, Mr. Chairman. 

Mr. Hornbuckle, do you have any estimates, either your company 

or the industry, do you have any estimates of what percentage of 

Internet gambling is run through companies like yours, that have 

submitted their odds that Mr. Scott asked about, for example, to 

Mississippi, New Jersey and Nevada, and what percentage is completely unregulated at the present time? 

Mr. HORNBUCKLE. I would suggest to you that all operators, 

where they have their jurisdiction and licensing regimes, would tell 

you that they’re regulated. So I think it’s a matter of what you 

would consider regulation. 

What we go through in the Isle of Man and what ultimately 

holds us to our standard based in Nevada and all that we have at 

24

stake, is a different bar and a bar we all ought to get to, and potentially what happens in a Caribbean country. But they would tell 

you that they are regulated. Our games are out there, registered 

with the Isle of Man government, within certain standards that 

they call out, and we have to adhere to those standards. 

Mr. FEENEY. What you have suggested without saying it is that 

some of your competitors may not have the integrity that MGM 

does. I guess my question would be, what percentage of the Internet gambling today is with less credible entities than MGM, in 

your opinion? 

Mr. HORNBUCKLE. With all due respect, sir, I would like to hold 

comment on that. [Laughter.] 

I couldn’t accurately give that estimation anyhow. 

Mr. FEENEY. Maybe Mr. Malcolm has an opinion about that. 

Mr. MALCOLM. My guess, Mr. Feeney, would be that a whole 

bunch of them are less scrupulous and less honorable than MGM 

MIRAGE. 

Mr. FEENEY. Assuming that most consumers in America are reasonably wise, that would suggest the addictive tendencies of Internet gamblers to me, anyway, because to the extent that I want to 

be entertained for a reasonable value for my buck and I want some 

reasonable odds in return, I’m probably going to pursue regulated 

places to gamble, where I can be assured of a fair square deal, even 

though I understand it’s ultimately in the house’s advantage. 

Isn’t this suggestive that Internet gamblers behaviorally, Mr. 

Hornbuckle, may tend to be more addictive and less responsible 

gamblers? 

Mr. HORNBUCKLE. I don’t know that it suggests it’s more addictive. I will tell you that the commercialities of odds and what goes 

on in the Internet world at large are such that, to be competitive 

and to survive, nobody is taking huge advantage of customers out 

there, or they won’t. 

Gamblers are savvy, particularly the ones that are on line. To 

the extent they then ultimately get compensated for their wagers 

and their winnings, if they have some—and they do have some—

I think speaks to the credibility of who the operator is. That’s 

where you get into issues of are they licensed, are they credible, is 

a brand like MGM MIRAGE meaningful or not. That’s something 

that would ultimately be up to the general public to decide. 

Mr. FEENEY. I would like to ask my colleague, Congressman 

Leach, if he has an opinion about the elasticity of demand for gambling as it relates to Internet opportunities 

Our staff estimates that, in the last 10 years, we have had 

roughly a ten-fold increase in American dollars wagered over the 

Internet. I would like to ask my colleague if he’s got an opinion. 

Does that come at the expense of gambling on things like lotteries, 

regulated casinos, gambling ships, penny ante games and office 

pools, or is this increase likely to be in addition to all the above? 

Not to mention pork belly futures on the mercantile market. 

Mr. LEACH. Well, I’m not an expert. Frankly, the competitive aspect would be better asked of someone from MGM that would know 

that better than I. 

25

I would say there are two things that stand out. One is the terrific growth in the Internet. Clearly, there is some competition with 

casino gambling. How big that is, I don’t know. 

Secondly, the fact is that there are lots of studies of the gambling 

issue, per se. Your National Commission on Gambling went into 

some of this, which shows that there is part of America that really 

does get hooked in analogous ways to alcohol or drugs, and then 

some correlation between the two. That is, if one is likely to be 

hooked on a drug or alcohol addition, one is as little more likely 

to be an addictive gambler. But the key thing is, one can quite 

quickly and rapidly lose a great deal. 

Certainly there is a case, as MGM has made, that it would be 

better if you were to deal with a reputable company versus less 

reputable. But I think the more compelling case is to deal with nobody. 

I would defy anyone on this panel to give me a strong social case 

for Internet gambling. I mean, what is it? Is there a national interest case for it? Is there an individual family case for it? And then 

to think in reverse terms, are there some disadvantages to the 

country, some disadvantages to the individual? I think it gets pretty compelling. 

Mr. COBLE. The gentleman’s time has expired. 

The gentlelady from Texas. 

Ms. JACKSON LEE. Thank you very much, Mr. Chairman. I would 

ask unanimous consent that my opening statement be allowed to 

be submitted in the record. 

Mr. COBLE. Without objection. 

[The prepared statement of Ms. Jackson Lee follows:]

PREPARED STATEMENT OF THE HONORABLE SHEILA JACKSON LEE, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF TEXAS

I would like to thank Chairman Coble and Ranking Member Scott for convening 

this very important hearing today. 

We are here today to hear testimony and discuss two bills related to Internet 

gambling—H.R. 21 and H.R. 1223. 

There have been attempts in the last two Congresses to outlaw internet gambling, 

or in the alternative to restrict internet gambling such as restricting how bets are 

made. The bills we are considering today are continuation of those prior efforts. 

H.R. 21 prohibits internet gambling businesses from accepting bets from credit 

cards, electronic fund transfers, money transmitting business transfers, and instruments or transactions drawn through financial institutions. It also grants Federal 

district courts jurisdiction over violations of bill, requires the Secretary of the Treasury to prescribe regulations on payment systems and policies to prevent restricted 

transactions, and calls for U.S. and foreign governments to cooperate to prevent 

money laundering and other crimes. 

The issue of internet gambling is always debated vigorously. The Internet gambling industry receives wagers amounting to an estimated $4.2 billion dollars per 

year through 1,800 internet gambling sites. Internet gambling has a high likelihood 

of causing personal bankruptcy, provides a fertile ground for fraud and money laundering, is difficult for states to regulate, and offers an addictive and appealing gambling outlet for children. 

I was an original co-sponsor of H.R. 3215, an internet gambling bill considered 

in the last Congress, because of my grave concern that children and teenage gamblers, who have wide access to the Internet, will abuse the Internet for gambling. 

A study released by the American Psychological Association finds that pathological 

gambling is more prevalent among youths than adults. Between five and eight percent of young Americans and Canadians have a serious gambling problem, compared 

with one to three percent of adults. The study went on to say that with gambling 

becoming more accessible in U.S. society, it will be important to be able to intervene 

26

in children’s and adolescent’s lives before the activity can develop into a problem 

behavior. 

Many Internet gambling sites require bare minimum information from gamblers 

to participate. Security on bets placed over the Internet has proven ineffective. And 

unlike traditional regulated casinos, Internet operators have no demonstrated ability or requirement to verify a participant’s age or identification. Also, an Internet 

gambling site can easily take a person’s money, shut down their sites, and move on. 

Gambling over the Internet, particular because of the danger it poses to our children, is a business that I simply cannot condone. Given the fact that the majority 

of our citizens have access to computers and the Internet, we must ensure that laws 

are in place to eliminate the potential harm of internet gambling. 

While I am concerned about the impact of gambling, I am also concerned with 

protecting individual freedoms and personal choices. The freedom to gamble is such 

a choice. I look forward to hearing the testimony and comments by our speakers 

today in order to reconcile these issues. We must find a way to address this very 

serious problem of Internet gambling.

Ms. JACKSON LEE. I thank you very much, and I thank the gentlemen for their presentation, and Congressman Leach as well. 

Over the course of my tenure in Congress, I have had the opportunity to be supportive of restrictions on Internet gambling, for a 

variety of reasons, but I think particularly on the issues dealing 

with money laundering, underage gambling, and gambling addiction, which permeate in many instances throughout the industry, 

regardless of whether it’s Internet or person to person. 

I do compliment the industry for being particularly sensitive to 

these issues over the years and working collaboratively with mental health groups and State groups on trying to prevent this. So I 

would like to find the best approach, the best reasonable approach 

to address a concern that will continue to grow with the utilization 

of Internet technology. Computer technology is growing, and we’re 

going to find people doing everything with respect to computer software, and I think we have to be sensitive to that. 

Let me ask Mr. Hornbuckle how much Federal regulation does 

the industry have now, just in general. 

Mr. HORNBUCKLE. As it relates specifically to my activity on line, 

little to none. 

Ms. JACKSON LEE. And overall? 

Mr. HORNBUCKLE. Currently in our activity, it all comes out of 

the Isle of Man, and it is underwritten by what our code, what our 

licensing requirements are for places like Nevada and Mississippi, 

Michigan, et cetera. We have a great deal of respect for what we 

have there, so the way we conduct our business activity and the 

code that’s called out, which I have included, both against antimoney laundering and the regs themselves from the Isle of Man 

govern our overall activity. 

Ms. JACKSON LEE. So you’re saying that you are registered under 

or incorporated under the Isle of Man. Are you’re talking about all 

the MGM properties, for example, the ones in Las Vegas? 

Mr. HORNBUCKLE. No, no, just for online activity. I’m sorry. 

Ms. JACKSON LEE. Let me ask you to put on your other hat, just 

put on the hat for the overall. Tell me what kind of regulation it 

is for the overall business. 

Mr. HORNBUCKLE. For overall business, we’re probably one of the 

most licensed, if not the most licensed, industries in this country. 

From Nevada, Mississippi, New Jersey and Michigan, there’s an 

extensive amount of licensing we go through, and probity, both as 

individuals and for our company. From understanding the Wire 

27

money control Act, from understanding our customers, know your 

customer regimes, all of that activity goes on in our buildings. We 

have strict Reg 6–A requirements that we adhere to. 

So, from a licensing perspective, and from a responsible gaming 

perspective, we have a full plate of things that we do that we look 

to bring to bear ultimately in this space. 

Ms. JACKSON LEE. So by licensing, obviously that equates to regulation, that equates to, as I understand it, State law enforcement, 

who are pretty much knowledgeable about your business. 

Mr. HORNBUCKLE. One hundred percent knowledgeable. 

Ms. JACKSON LEE. In the respective States, whether it’s Michigan, Mississippi or Las Vegas——

Mr. HORNBUCKLE. Correct. 

Ms. JACKSON LEE.—you certainly are well-known and your business is well-known, and State legislators have regulated you, it is 

my understanding, correct? 

Mr. HORNBUCKLE. That is correct. 

Ms. JACKSON LEE. And you adhere to those regulatory requirements, which subject you to either civil and/or criminal penalties? 

Mr. HORNBUCKLE. That’s correct. 

Ms. JACKSON LEE. This is a business that you would say has gotten more dynamic over the last how many years? I’m talking about 

Internet gambling. 

Mr. HORNBUCKLE. The last two to 3 years specifically. 

Ms. JACKSON LEE. And it brings in about how much money? 

Mr. HORNBUCKLE. It’s suspect, but our best guess is between $4–

5 billion and growing, growing particularly in Asia and Europe, as 

well as in the U.S. Despite the activity that has gone on over the 

last year, the U.S. continues to grow at about a 20 percent rate, 

we believe. 

Ms. JACKSON LEE. Why the approach using the Isle of Man as 

opposed to the different jurisdictions that you’re already in, the different States that you’re already in? 

Mr. HORNBUCKLE. Because of concerns for the Wire Act, and 

what is happening here in the U.S., we didn’t think it prudent, 

given all that was at stake. We do not accept U.S. bets. We consider that off limits for now, and until this is made crystal clear 

to us, we will not accept U.S. bets. 

The Isle of Man presented a jurisdiction that was very serious 

about money laundering. It has, much like Nevada is based on 

gaming, it is based on financial market sectors. They restricted 

their operation in taking U.S. bets, and they required all their operators to put up a two million pound bond to protect consumers. 

Those are some of the things that regulation would bring. We 

couldn’t get licensed unless we put up two million pounds, that sits 

in trust for consumers if we decide to cease doing business. 

Ms. JACKSON LEE. Do you think you’re prone to more criminal 

activity, or have you surmised, or are you willing to give me the 

honest truth? Have you surmised a great deal of criminal activity 

in light of your present structure? 

Mr. HORNBUCKLE. No. To the contrary. We are very focused on 

our business. We have so much at stake for this venture, we’re very 

focused on our business. 

28

Ms. JACKSON LEE. Let me talk to Mr. Malcolm at this point. As 

I indicated, I have been supportive, but I would think—Mr. Chairman, would you yield me an additional minute? 

Mr. COBLE. One additional minute. 

Ms. JACKSON LEE. Thank you. 

I have noted that the Department of Justice has its hands quite 

full. What component with the Wire Act, I know, and what other 

aspects of the gambling industry here in the States do you regulate 

presently? 

Mr. MALCOLM. Specifically, there are——

Ms. JACKSON LEE. Federal jurisdiction. That’s what I mean. 

Mr. MALCOLM. There are several Federal statutes that cover this 

particular topic. The Wire Act is only one of them. The Wire Act 

makes it a crime to transmit in interstate or foreign commerce bets 

on——

Ms. JACKSON LEE. Existing. These are existing——

Mr. MALCOLM. Right. In 1952, the Travel——

Ms. JACKSON LEE. I could run through them rather quickly because my time is going to go, and I just want to——

Mr. MALCOLM. 1084, 1952, 1955, RICO could arguably apply. 

There are several other statutes. 

Ms. JACKSON LEE. RICO I know could apply to what I would call 

person-to-person gambling, or the industry itself. Is there something in particular that—just forget about on-line. Do you regulate 

the industry, or do you interact with the States? You have specific 

laws to regulate the industry as it stands now, without online? 

Mr. MALCOLM. I’m not sure of the interplay between the Federal 

regulators and the State regulators, but suffice it to say we work 

closely with them. Some of the Federal statutes are specifically enabled based on a violation of State law. 

Ms. JACKSON LEE. Let me just comment on that. I appreciate it 

very much. I have always been one, when it comes to enhancing 

protection by utilizing the Federal authority, I am certainly open 

to it. I respect the work of Chairman Leach, but I perceive more 

potential confusion than not without a full appreciation of the impact of the prohibition on using credit cards and other vehicles, 

other bank instruments, to gambling on the Internet. 

What I would propose, Mr. Chairman, and would think would be 

valuable, is to look carefully at 1223—additional 30 seconds, Mr. 

Chairman. I just want to close this sentence. What I’m concerned 

about, Mr. Chairman, is the fact that we need to study this question and understand it a little better, to see how the mix of State 

regulations, which Mr. Hornbuckle seems to be very much regulated on his regular gambling, and see how that works in order to 

tell us what is the best way to get to the point of prohibiting money 

laundering, underage gambling, and gambling addictions, versus 

the total prohibition, before we know what the facts are. 

I thank the gentleman for yielding. 

Mr. COBLE. The gentlelady’s time has expired. 

Folks, we have another hearing scheduled for this afternoon, but 

since there are only four of us here, I’m going to do a second round. 

Let’s do a second round real quickly. I have three questions I want 

to put to you, and I am going to start with Mr. Malcolm. 

29

Mr. Malcolm, I think you have some problems with the injunction provisions, do you not? 

Mr. MALCOLM. That is correct. 

Mr. COBLE. Is there a more effective way of drafting the injunction provisions of the bill? 

Mr. MALCOLM. Specifically, I have problems with a couple of the 

injunction provisions. With respect to the ISPs, section 3(c)(4) imposes limitations on the relief that ISPs—that can be granted 

against ISPs. In addition, the websites themselves have ancillary 

services. But we’re working with the industry to tinker with that. 

More particularly, Mr. Chairman, there are limitations, there are 

various factors set forth in section 3(c)(5) of the bill. We believe 

that, while we recognize the important role the regulators have to 

play—and we’re working with Treasury to ensure coordination—we 

object to the addition of any factors beyond the standard factors set 

forth in Federal Rules of Civil Procedure 65. 

Mr. COBLE. Thank you. 

Mr. Hornbuckle—strike that. Mr. Modisett, your argument, I believe, seems to suggest that to legalize Internet gambling seems to 

be based upon the size of the industry and the rate of growth that 

it’s increasing. Some would suggest that it is not responsible for 

governments to legalize a criminal activity simply because it’s 

growing or flourishing. 

What do you say to that? 

Mr. MODISETT. I would not say that my argument is based on the 

growth factor. I would say it is based on, first of all, the fact that 

those people who are playing, whatever the size, are currently in 

a highly unregulated environment. And I’m not referring to Mr. 

Hornbuckle’s enterprise. I’m referring to those that are basically 

out of the Caribbean Islands and some of the other 1,800 that have 

been referred to here today. 

I would like to drive those into a highly regulated space so that 

we have more control, more consumer protections, could impose 

preset loss limits, we could do a better job of making sure that minors aren’t gambling, various other advantages that would come 

from this highly regulated regime. 

My other concern is based on the fact that we have heretofore 

not jumped into an Internet space and called for an out-and-out 

prohibition, with the possible exception of such an obvious evil as 

child pornography. But with regard to something that is legal in 

some areas, not legal in other areas, this would be our first jump 

in, where we just out-and-out said that we are not going to allow 

an American business to have any financial transactions whatsoever. 

I think that is a very big move, and it’s a move that should take 

place only after further study. 

Mr. COBLE. Good. Thank you, sir. 

Finally, Mr. Leach. Some contend that Internet gambling is already illegal under the Wire Act and, therefore, this legislation is 

unnecessary. I’m not saying that. Some say it. 

Comment on this, if you will, and explain why your bill is necessary? 

Mr. LEACH. I accept the premise that I believe the Wire Act covers Internet gambling, although some court jurisdictions have gone 

30

to the contrary. But what our bill does—and it’s carefully crafted 

to fit into whatever your Committee does—it is an added enforcement mechanism of whatever the law is at any point in time. So 

if you want to expand or contract the law, that’s the jurisdiction 

of this Committee with the Congress. But all we do is add an enforcement mechanism. 

It happens, and it’s really a bizarre fact of how the private sector 

interrelates with the public, that the public has had virtually no 

capacity to enforce this, so your Department of Justice can testify 

that there are all these gambling sites but it cannot testify that it 

has terribly effectively shut them down. I’m not saying that the 

fault of the Department of Justice. All I’m saying is that that’s a 

circumstance. 

The approach of this bill is designed simply to serve as a functional deterrent, based on enforcement utilizing the private sector. 

Let me tell you, it has taken a lot of effort to get acceptability or 

consensus, as grudgingly as it may be, because you’re putting a 

new obligation on the private sector, a private sector that principally the Financial Services Committee interrelates with more 

than other Committees of the Congress. 

I personally accept the broad interpretation that the Justice Department has applied, that the Wire Act does apply to Internet 

gambling, but there is no precise reference in the Wire Act to that, 

so it’s a broad interpretation of intent, I think, would be the description, as a nonlawyer having the disadvantage of addressing all 

of you that are better educated. 

Mr. COBLE. Thank you, Mr. Leach. I see my red light is about 

to appear. 

The gentleman from Virginia. 

Mr. SCOTT. Thank you, Mr. Chairman. 

The gentleman from Iowa indicated or asked us to make the social case for Internet gambling. Frankly, I think it’s a difficult case 

to make, but that’s not the question before us. I think the Justice 

Department official, Mr. Malcolm, has indicated that it’s already 

out there, so the question is what are you going to do. 

This bill, H.R. 21, doesn’t prohibit Internet gambling. It makes 

it a little more administratively challenging to place the bet, but 

as we’ve heard, not impossible and not even that difficult, after you 

do a little investigation. So the social case isn’t the question before 

us. The question is what to do about reality. 

I would ask Mr. Hornbuckle, can you access your site from outside of the United States, anywhere outside of the United States? 

Mr. HORNBUCKLE. There are about ten countries that we accept 

wagers from. UK is our principal market, though, by example. 

Mr. SCOTT. Canada? 

Mr. HORNBUCKLE. No. 

Mr. SCOTT. Mexico? 

Mr. HORNBUCKLE. No. Mostly Western Europe, South Africa, 

New Zealand, principally in Western Europe and a couple of Scandinavian countries. 

Mr. SCOTT. Now, you pay off your bets because your reputation 

would be at stake if you didn’t. The problem with websites is you 

can create a website today and shut it down tomorrow afternoon. 

If we don’t regulate it, what prohibition would there be, or how 

31

would you deal with a website that sets up, takes a lot of money, 

and then just closes down? What remedy would a gambler have if 

that happened? 

Mr. HORNBUCKLE. In today’s environment—I can think of three 

sites over the most recent Super Bowl, where the underdog won 

and it closed. I know it’s reality, but they did, in fact, close. To my 

understanding, those people were left unpaid. 

In the Isle of Man, or in any regulated environment—in our example of the Isle of Man, we are bonded for two million pounds. 

That’s what that money is for. To the extent we went out of business, or anybody else would go out of business, there would be reserve funds to take care of those people. 

Mr. SCOTT. Does the two million pounds, how does that compare 

to the money that’s coming in and out? 

Mr. HORNBUCKLE. Right now, the money that comes in and out 

on an ongoing basis, that we hold in balance, where people leave 

an account, it’s maybe 5 percent of that number. It’s not—and it’s 

monitored constantly by the government. To the extent it approaches it, they have reserved the right to look at that number 

again. 

Mr. SCOTT. So that you would be bonded for the amount that 

would be owed if you went out of business? 

Mr. HORNBUCKLE. That’s the theory behind it, yes. Obviously, it’s 

a new industry, but that is absolutely the theory behind that bond. 

Mr. SCOTT. And if somehow I got access to a fancy looking 

website and gambled and happened to win, and they went out of 

business, if they were unregulated I would have no recourse? 

Mr. HORNBUCKLE. That’s correct. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Mr. COBLE. Thank you. 

The gentleman from Florida. 

Mr. FEENEY. Mr. Hornbuckle, when it is your physical casino at 

MGM, you entertain ‘‘high rollers’’. Do you pre-qualify them with 

credit applications and verification, the same way a banker would 

do? 

Mr. HORNBUCKLE. In some instances, that’s correct. 

Mr. FEENEY. Do you do that with any of your Internet gamblers 

as well? 

Mr. HORNBUCKLE. Yes, we do. Again, the documents that we submitted, under the money laundering provisions, anybody who puts 

over a thousand dollars on deposit has got to then give to us copies 

of either a passport, national ID, or some other form of ID that the 

Government has specified. So the answer is, at that level or above, 

it’s not identical but close in principle to what we do in highly regulated markets like in Nevada. 

Mr. FEENEY. But presumably, if we did not disallow or prohibit 

financial institutions from providing credit to gamblers, presumably there would be no prohibition from somebody without the ability to comfortably lose a significant sum of money, $500 or $1,000 

or more. There would be nothing to require the casino or the financial institution, other than the credit limit on their credit card, to 

regulate whether or not this was a prudent amount of money for 

somebody to be putting down on a game of chance. 

32

Mr. HORNBUCKLE. In an unregulated market, I would have to 

agree with that. In a regulated market, at least you have an opportunity to get into that discussion. I guess that could be said about 

many things in life as well. I mean, this happens to be gaming, but 

I think regulatory restrictions on that are key. 

Mr. FEENEY. I guess I wanted to ask Congressman Leach, because I’m very sympathetic toward the goals of H.R. 21. But it does 

seem to me that in certain types of high risk investments, for example, the SEC and other regulators require that the sellers and 

the marketers of the instruments, they are a very high risk insurer 

that is only a small percentage of the net worth of the individual 

that’s being put into this high risk venture. 

Isn’t there an opportunity through regulation that doesn’t exist 

through prohibition to sort of, you know, protect people from themselves? 

Mr. LEACH. Well, I think you can provide a modicum of protection. You know, that’s clear. Whether that protection is very significant in relationship to the broad scope of the problem is a matter 

of individual judgment. I would fully acknowledge that there are 

advantages to some types of protection relative to no types of protection, but I believe the subject matter in general is one that, if 

you can’t make a social case for it, what difference does it make 

if you have a little more protection? So I don’t find it a compelling 

concern. Certainly, parts of things that MGM would propose today 

are quite respectable. 

Mr. FEENEY. I think that’s a fair admission. I mean, certainly we 

have a lot of seniors in Florida, and some of them have been to the 

dog track every day of their adult lives. They get to a point where 

they can’t drive, can’t travel, and if somebody with a net worth of a million dollars wants to bet $20 on the third race every day at 

Calder from his living room, I don’t think you’re suggesting that 

that is necessarily anti-social or dangerous behavior. 

Mr. LEACH. I think there are examples where one could find this 

is quite a tolerable circumstance. There are also examples where 

one would say this is truly tragic for the individuals involved. 

Mr. FEENEY. Mr. Modisett, or maybe Mr. Malcolm as well may 

want to answer this last question. The ingenuity and creativity and 

the technical skills of young people never ceases to amaze me. They 

are able to break into Pentagon-secure matters and they are able 

to turn upside down the whole computer networks of corporations. 

My oldest son is just 10, but at some point, if he wants to get into 

my credit card system and my computer system and avail himself, 

I have no doubt that he or somebody like him, at age 14 or 16, will 

have all of the knowledgeable capabilities necessary. 

How do you deal with the issue that, at least if he tries to enter 

a casino, somebody is going to have to look him in the eye and presumably be responsible for physically carding him, physical security, et cetera. How do you answer the question that there simply 

is no way to regulate what goes on inside that house with people 

under age? It’s not addicts, necessarily, but people who are not able 

to lawfully consent to the contract. 

Mr. MODISETT. I think that with regard to actual computer hackers, those that are quite proficient at getting around particular systems, as Mr. Hornbuckle said, there is no foolproof way that you 

33

could say 100 percent to keep them out. But I would say that the 

instance with regard to Internet gaming would be no worse than 

it would be with regard to any other activity on the Internet. 

There is technology out there—and MGM has referred to some 

of it—that is about as foolproof as you can get in modern society 

and high technology. I would rather see a piece of that sort of technology—I was advising at one point another company that was 

skill-based, so it wasn’t wasn’t gaming but was skill-based on the 

Internet. They had the technology, and others do now, to make 

sure that no juveniles were using it. They had preset limits so that 

no one could go over a particular amount, the sort of regulation 

that you would like to see instead of it being the ‘‘wild west’’, which 

we have, with regard to too many of these Internet gaming sites 

now. 

Mr. MALCOLM. May I briefly respond, Mr. Feeney? 

I think you hit the nail on the head. While perhaps there is software out there that is as good as it can be, my understanding is 

that that software is far from perfect. In addition to that, software 

is easily manipulable. If you have a physical location where a 

minor has to go, they can get proof of identification, they can eyeball that person. This is not a hypothetical problem. One in ten 

boys, every month, is engaging on a monthly basis in Internet gambling. College students, who have recently gotten credit cards but 

have no money, are up to their eyeballs in debt because they’re 

spending all night on online gaming poker situations. 

Mr. MODISETT. If I could just add to that, Mr. Congressman, I 

was chair of the Indiana Gambling Impact Study Commission, and 

when we did our poll, we also asked questions about Internet gaming among youth. We came up with 0.4 percent that had said they 

had even attempted to gamble on the Internet. So——

Mr. MALCOLM. I would just refer to—There’s a study coming out 

by the Annenberg Public Policy Center at the University of Pennsylvania, and that’s where I got that statistic from. 

Mr. COBLE. The gentleman’s time has expired. 

Mr. Scott? 

Mr. SCOTT. Mr. Chairman, I would ask Mr. Malcolm if he would 

be willing to respond to questions in writing, particularly about the 

section that I indicated, and I think the Ranking Member of the 

Committee has some questions about that section. 

Mr. MALCOLM. I would be delighted to, Mr. Scott. 

Mr. SCOTT. With that, Mr. Chairman, I would ask unanimous 

consent that the hearing record be kept open until at least the 

mark up on either of these bills. 

Mr. COBLE. And I would also say that any Member of the Subcommittee who wanted to submit written requests, that would be 

in order. 

Gentlemen, we thank you all for your contribution today. This 

concludes the hearing and we appreciate your contribution. 

The record will remain open for 1 week. Thank you for your cooperation. The Subcommittee stands adjourned. 

[Whereupon, at 3:20 p.m., the Subcommittee adjourned.] 

(35)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE HOWARD COBLE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NORTH CAROLINA

Today, the Subcommittee on Crime, Terrorism, and Homeland Security addresses 

a serious and growing problem for our Country. The problem of Internet gambling. 

It is now estimated that $4.2 billion is wagered over the Internet each year. This 

is an increase from $445 million just six years ago. There are currently more than 

1,800 Internet gambling sites, and the total dollar amount wagered worldwide is expected to reach $10 billion in the near future. 

The most troubling aspect of Internet gambling is the relative ease of accessibility 

for our nation’s children. The anonymous nature of the Internet makes it almost impossible to prevent underage gamblers from using their parents’ credit cards, or 

even their own in some cases, to log on to a gambling website. Many Internet sites 

require nothing more than a name, address, and credit card number. Those sites 

that do require a person to disclose his or her age make little or no effort to verify 

this information. 

Another group of people particularly susceptible to Internet gambling are America’s problem gamblers. The National Council on Problem Gambling estimates that 

there are currently eleven million Americans directly suffering from gambling problems. High rates of financial debt, unemployment, bankruptcy, divorce, homelessness, and suicide are all associated with problem gambling. Virtual casinos and 

their video game structure have been labeled the ‘‘crack cocaine of gambling.’’ These 

facilities are open twenty-four hours a day, seven days a week, all within a person’s 

own home. By making gambling more convenient, it can do nothing but make the 

problem worse. 

In addition to the social problems associated with Internet gambling, these Internet sites also offer organized crime groups a very simple and easy opportunity to 

launder the proceeds of their criminal activity. Because of the lack of oversight or 

regulations and the high degree of anonymity, money laundering through Internet 

gambling sites is already a major concern to our nation’s law enforcement agencies. 

Federal law is currently unclear as to whether or not all types of Internet gambling is illegal. The statute that most directly restricts the use of the Internet to 

place bets is the ‘‘Wire Act’’ under section 1084 of Title 18 of the U.S. Code. However, because this statute was written before the age of the Internet and the use 

of wireless communication, there is ambiguity as to what type of betting is or is not 

covered. Also, the types of gambling mentioned in the statute may not cover all of 

the different types of gambling available on the Internet. 

Today we will examine two bills that attempt to address the problems of internet 

gambling in two very different ways. H.R. 21, the ‘‘Unlawful Internet Gambling 

Funding Prohibition Act’’ introduced by Congressman Jim Leach of Iowa, seeks to 

ban Internet gambling by prohibiting the use of financial instruments, such as credit cards, in any transaction invoving illegal Internet gambling. H.R. 3215, the ‘‘Combatting Illegal Gambling Reform and Modernization Act’’ introduced by Congressman John Conyers of Michigan, seeks to establish a commission to study the feasibility of regulating Internet gambling rather than banning it. 

I look forward to the testimony of the witnesses here today which will help this 

Subcommittee decide what is the best approach to take with regard to this very important subject.

36

PREPARED STATEMENT OF THE HONORABLE BOB GOODLATTE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF VIRGINIA

Thank you Mr. Chairman for holding this very important hearing. I would like 

to commend my colleague, Congressman Jim Leach, on his tireless efforts to address 

the problem of Internet gambling. 

The Internet is a revolutionary tool that dramatically affects the way we communicate, conduct business, and access information. As it knows no boundaries, the 

Internet is accessed by folks in rural and urban areas alike, in large countries as 

well as small. The Internet is still expanding by leaps and bounds and more and 

more citizens are logging on to the Internet at home; however, it has not yet 

reached its full potential as a medium for commerce and communication. 

One of the main reasons that the Internet has not reached its potential is that 

many folks view it as a wild frontier, with no safeguards to protect children and 

very few legal protections to prevent online criminal activity. The ability of the 

World Wide Web to penetrate every home and community across the globe has both 

positive and negative implications—while it can be an invaluable source of information and means of communication, it can also override community values and standards, subjecting them to whatever may or may not be found online. In short, the 

Internet presents a challenge to the sovereignty of civilized localities, States, and 

nations to decide what is appropriate and decent behavior. 

Gambling is an excellent example of this situation. Gambling is currently illegal 

in the United States unless regulated by the States. As such, every state has gambling statutes to determine the type and amount of legal gambling permitted. With 

the development of the Internet, however, prohibitions and regulations governing 

gambling have been turned on their head. No longer do people have to leave the 

comfort of their homes and make the affirmative decision to travel to a casino—they 

can access the casino from their living rooms with the click of a button. 

Since 1868, the federal government has enacted federal gambling statutes when 

a particular type of gambling activity has escaped the ability of states to regulate 

it. For over one hundred years, Congress has acted to assist states in enforcing their 

respective policies on gambling when developments in technology of an interstate 

nature, such as the Internet, have compromised the effectiveness of state gambling 

laws. 

The negative consequences of online gambling can be as detrimental to the families and communities of addictive gamblers as if a bricks-and-mortar casino was 

built right next door. Online gambling can result in addiction, bankruptcy, divorce, 

crime, and moral decline just as with traditional forms of gambling, the costs of 

which must ultimately be borne by society. 

Gambling on the Internet is especially enticing to minors, pathological gamblers, 

and criminals. There are currently no mechanisms in place to prevent youths—who 

make up the largest percentage of Internet users—from using their parents’ credit 

card numbers to register and set up accounts for use at Internet gambling sites. In 

addition, pathological gamblers may become easily addicted to online gambling because of the Internet’s easy access, anonymity and instant results. Dr. Howard J. 

Shaffer, director of addiction studies at Harvard, likens the Internet to new delivery 

forms of addictive drugs: ‘‘As smoking crack cocaine changed the cocaine experience, 

I think electronics is going to change the way gambling is experienced.’’ Finally, 

Internet gambling can provide a nearly undetectable harbor for criminal enterprises. 

The anonymity associated with the Internet makes online gambling more susceptible to organized crime and money laundering. 

I have long been a champion of the Internet and an advocate of limited government regulation of this new medium. However, that does not mean that the Internet 

should be a regulatory free zone or that our existing laws should not apply to the 

Internet. I think we can all agree that it would be very bad public policy to allow 

offline activity deemed criminal by states to be freely committed online and to go 

unpunished simply because we are reluctant to apply our laws to the Internet. 

Gambling on the Internet has become an extremely lucrative business. Numerous 

studies have charted the explosive growth of this industry, both by the increases in 

gambling websites available, and via industry revenues. The Internet gambling industry’s revenues grew from $445 million in 1997 to an estimated $4.2 billion in 

2003. It has been reported that there are currently more than 1,800 gambling sites. 

Furthermore, industry analysts estimate that Internet gambling could soon easily 

become a $10 billion a year industry. 

Most of the more than 1,800 Internet gambling websites are operated from offshore locations. Virtual betting parlors accepting bets from individuals in the United 

States have attempted to avoid the application of United States law by locating 

themselves offshore and out of our jurisdictional reach. These offshore, fly-by-night 

37

Internet gambling operators are unlicensed, untaxed and unregulated and are sucking billions of dollars out of the United States. In addition, the FBI and the Department of Justice have recently testified that Internet gambling serves as a vehicle 

for money laundering and can be exploited by terrorists to launder money. 

H.R. 21, the Unlawful Internet Gambling Funding Prohibition Act will add a new 

provision to the law that would prohibit a gambling business from accepting certain 

forms of non-cash payment, including credit cards and electronic funds transfers, for 

the transmission of illegal bets and wagers. The bill also gives Federal and State 

law enforcement new injunctive authority to prevent and restrain violations of the 

law. 

H.R. 21 will return control to the states by protecting the right of citizens in each 

State to decide through their State legislatures if they want to allow gambling within their borders and not have that right taken away by offshore, fly-by-night operators. 

The 104th Congress created the National Gambling Impact Study Commission 

and charged it with conducting a comprehensive legal and factual study of gambling, including an assessment of the interstate and international effects of gambling by electronic means, including the use of interactive technologies and the 

Internet. The Commission recommended to Congress that federal legislation is needed to halt the expansion of Internet gambling. 

As the National Gambling Impact Study Commission has documented, and Senate 

and House hearings have confirmed, Internet gambling is growing at an explosive 

rate. It evades existing anti-gambling laws, endangers children in the home, promotes compulsive gambling among adults, preys on the poor, and facilitates fraud. 

H.R. 21 will help to stop this harmful activity before it spreads further. I urge my 

colleagues to support this very important legislation. 

HR 1223, the Internet Gambling Licensing and Regulation Commission Act, attempts to attack the Internet gambling problem from another angle, namely regulation. The bill establishes a commission to study the issues involved with the licensing and regulation of Internet gambling activities. 

However, there are many concerns associated with setting up a national commission to regulate the offshore Internet gambling industry. Regulation would legitimize gambling activities, which have been shown to cause addictive behavior, bankruptcies, and associated family problems. In addition, it is doubtful that regulation 

would effectively curb the fraud, money laundering and other organized criminal activities associated with offshore Internet gambling websites. 

Thank you again, Mr. Chairman, for holding this important hearing.

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————— Note: At the time of the printing of this hearing, no response to Rep. Conyers’ questions had 

been received by the Subcommittee on Crime, Terrorism, and Homeland Security.

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