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S. HRG. 113–84 

THE EXPANSION OF INTERNET GAMBLING: 

ASSESSING CONSUMER PROTECTION CONCERNS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CONSUMER PROTECTION, 

PRODUCT SAFETY, AND INSURANCE 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

JULY 17, 2013 

Printed for the use of the Committee on Commerce, Science, and Transportation 

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED THIRTEENTH CONGRESS 

FIRST SESSION 

JOHN D. ROCKEFELLER IV, West Virginia, Chairman 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

MARK PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

AMY KLOBUCHAR, Minnesota 

MARK WARNER, Virginia 

MARK BEGICH, Alaska 

RICHARD BLUMENTHAL, Connecticut 

BRIAN SCHATZ, Hawaii 

MARTIN HEINRICH, New Mexico 

ED MARKEY, Massachusetts 

JOHN THUNE, South Dakota, Ranking 

ROGER F. WICKER, Mississippi 

ROY BLUNT, Missouri 

MARCO RUBIO, Florida 

KELLY AYOTTE, New Hampshire 

DEAN HELLER, Nevada 

DAN COATS, Indiana 

TIM SCOTT, South Carolina 

TED CRUZ, Texas 

DEB FISCHER, Nebraska 

RON JOHNSON, Wisconsin 

JEFF CHIESA, New Jersey 

ELLEN L. DONESKI, Staff Director 

JAMES REID, Deputy Staff Director 

JOHN WILLIAMS, General Counsel 

DAVID SCHWIETERT, Republican Staff Director 

NICK ROSSI, Republican Deputy Staff Director 

REBECCA SEIDEL, Republican General Counsel and Chief Investigator 

SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, 

AND INSURANCE 

CLAIRE MCCASKILL, Missouri, Chairman 

BARBARA BOXER, California 

MARK PRYOR, Arkansas 

AMY KLOBUCHAR, Minnesota 

RICHARD BLUMENTHAL, Connecticut 

BRIAN SCHATZ, Hawaii 

DEAN HELLER, Nevada, Ranking Member 

ROY BLUNT, Missouri 

KELLY AYOTTE, New Hampshire 

DAN COATS, Indiana 

TED CRUZ, Texas 

DEB FISCHER, Nebraska 

(III) 

C O N T E N T S 

Page 

Hearing held on July 17, 2013 ............................................................................... 1 

Statement of Senator McCaskill ............................................................................. 1 

Statement of Senator Heller ................................................................................... 2 

Statement of Senator Blunt .................................................................................... 4 

Statement of Senator Schatz .................................................................................. 5 

Statement of Senator Ayotte ................................................................................... 51 

Statement of Senator Pryor .................................................................................... 53 

Statement of Senator Blumenthal .......................................................................... 54 

WITNESSES

Chuck Canterbury, National President, Fraternal Order of Police ..................... 5 

Prepared statement .......................................................................................... 7 

Matt Smith, President, Catholic Advocate ............................................................ 9 

Prepared statement .......................................................................................... 9 

Jack A. Blum, Esq. .................................................................................................. 10 

Prepared statement .......................................................................................... 12 

Thomas A. Grissen, Chief Executive Officer, Daon .............................................. 15 

Prepared statement .......................................................................................... 16 

APPENDIX

Letter dated July 12, 2013 to Hon. Claire McCaskill and Hon. Dean Heller 

from Keith Whyte, Executive Director, National Council on Problem Gambling ....................................................................................................................... 59

Response to written questions submitted by Hon. Amy Klobuchar to: 

Chuck Canterbury ............................................................................................ 60 

Jack A. Blum, Esq. ........................................................................................... 61 

Response to writtens questions submitted by Hon. Kelly Ayotte to: 

Chuck Canterbury ............................................................................................ 61 

Matt Smith ........................................................................................................ 63 

Jack A. Blum, Esq. ........................................................................................... 63 

Thomas A. Grissen ........................................................................................... 64 

(1) 

THE EXPANSION OF INTERNET GAMBLING: 

ASSESSING CONSUMER PROTECTION 

CONCERNS 

WEDNESDAY, JULY 17, 2013 

U.S. SENATE, 

SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT

SAFETY, AND INSURANCE, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:26 a.m. in room 

SR–253, Russell Senate Office Building, Hon. Claire McCaskill, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. CLAIRE MCCASKILL, 

U.S. SENATOR FROM MISSOURI 

Senator MCCASKILL. Good morning. Sorry that votes delayed our 

opening today. We are glad everyone is here, and we appreciate 

your attendance at this committee—subcommittee hearing. 

Today we will examine the expansion of online gaming and its 

implications for consumer protection and law enforcement. In December 2011, the Criminal Division of the Department of Justice 

issued a Memorandum Opinion that removed almost any Federal 

prohibition to online gaming, paving the way for States to legalize 

online gaming within their borders. 

Specifically, the Memorandum Opinion stated the scope of the 

Wire Act of 1961, long understood to criminalize all interstate online gaming, was limited only to prohibiting sports betting. By narrowing the scope of the Wire Act to sports, the Justice Department 

has liberated states to offer their in-state residents casino style online gaming. 

Online poker is already up and running in Nevada and New Jersey, and Delaware residents will have access to a full slate of online casino games this fall. Many other states are also actively considering the legalization of online gaming. Given that online gambling is a potential revenue source for cash strapped state governments, I fully expect more states to move ahead with legalized 

Internet gambling. And as more states act to legalize Internet gambling, I expect to see states authorize interstate compacts to allow 

their residents to conduct cross-border wagering. 

The question for today’s hearing is, what will be the consequences for consumer protection? Gambling, whether it is bingo 

or blackjack, has traditionally been regulated at the state level, 

and its state-based model remains in place for online gaming. Yet 

2 

technology, along with interstate compacts, will make it incredibly 

easy for consumers to gamble across state lines without stepping 

foot outside their front doors. 

Given this, does a patchwork of state laws and regulations sufficiently protect consumers from fraud? Can it prevent underage and 

problem gambling? Does the expansion of online gambling provide 

more conduits for criminal activity, such as money laundering? 

Worse, will terrorists be able to more readily use online gambling 

sites to launder money and finance their activities? These are all 

questions—legitimate questions—that I think Congress must ask. 

At traditional brick and mortar casinos, the states have done a 

relatively good job of regulating gaming. However, what works on 

the floor of a casino in Las Vegas, Atlantic City, Biloxi, or St. Louis 

may not work in the virtual world of online gambling. The Internet 

provides anonymity to players, a luxury not afforded to criminals 

and fraudsters in the real world. 

The anonymity of the Internet can provide minors with greater 

ability to illegally gamble, and it can allow easy access to individuals with gambling disorders to satiate their destructive habits. Is 

the current state-based regulatory regime prepared to handle all of 

these potential problems? 

It is worth noting that while the states have played the primary 

role in regulating gambling, Congress has also played a critical 

part. In addition to the Wire Act, Congress has passed a slew of 

gambling laws that address racketeering, sports betting, financial 

transactions, and Indian gaming. Furthermore, online gaming is 

inherently an interstate matter. The borderless nature of the Internet does not recognize the boundaries and jurisdictions of individual states. As such, Congress has an important role to play in 

overseeing the expansion of online gaming. 

For decades, the Wire Act was interpreted to be a Federal prohibition on Internet gambling. Virtually overnight, this legal assumption was eviscerated, and as a result, the landscape for the gambling industry and consumer protection has dramatically changed. 

Thus, it is entirely appropriate that Congress plays an oversight 

role to determine the consequences to American consumers. That 

is the purpose of this hearing. 

I want to thank Senator Heller for working with me on holding 

this hearing, and I want to further thank him and his staff for all 

their hard work in helping the Subcommittee staff. I know how important this issue is to Senator Heller, and I want to be as helpful 

and as accommodating to the Ranking Member as I can be. I think 

this is an important subject, and I think this discussion we are 

going to have today is an important public policy matter. 

And I will now turn it over to Senator Heller for his opening 

statement. 

STATEMENT OF HON. DEAN HELLER, 

U.S. SENATOR FROM NEVADA 

Senator HELLER. Good morning, Chairman. Thank you very 

much for holding this hearing, and I appreciate your remarks also. 

I want to thank the witnesses and those on the panel today for taking time out of their schedule to be with us today and for your expert testimony. 

3 

Online gambling and its implications on consumers have been an 

issue that Congress has focused on for over a decade. As many 

know, Internet gambling was accessible to U.S. consumers starting 

in the late 1990s and in the early 2000s. Illegal gambling on the 

Internet was on the verge of exploding in the United States, and 

for many years gambling websites were run by offshore operators, 

who, in defiance of U.S. law, offered online sports betting as well 

as casino type games, such as slots or roulette. Some operated from 

foreign jurisdictions, but many operated from small Caribbean 

countries that do nothing to protect consumers and protect minors. 

This all changed in 2006 when Congress, including seven members of this committee—four Democrats and three Republicans— 

enacted UIGEA, the Unlawful Internet Gambling Enforcement Act, 

to put an end to this wagering. The law was effective, and it was 

effective in going after the bad guy. But it was not a perfect law. 

There were still some issues that needed to be addressed in the bill 

in order to give our Federal agencies the tools they needed to stop 

illegal Internet gambling. 

Then we fast forward to December 23, 2011. What happened on 

December 23, 2011? The Department of Justice reversed its interpretation of the Wire Act. So, 50 years of precedent—50 years of 

precedent—was overturned. The Department of Justice argued that 

under the Wire Act, interstate gambling falls within the statute, 

even if the wire communications originate and terminates in the 

same state, provided the wire cross state lines at some point in the 

process. Because of this interpretation, all online wagering fell 

under the Wire Act. 

With one decision, the Department of Justice effectively rendered 

all laws that have been on our books, put together by Members of 

Congress for over 50 years, that this very body passed 2 days before Christmas, and made it useless to regulate and stop Internet 

gambling. 

The results are the floodgates are now open to states legalizing 

all forms of Internet gambling, such as casino games and lotteries. 

Five states have already acted, including the State of Nevada, and 

20 more are looking to act. Patchwork state and tribal regulations 

have sparked a regulatory race to the bottom. States that already 

do not allow Internet gambling will have difficulty now enforcing 

their own laws. On top of that, no discussion has been had as to 

consumer protections—what consumer protections will be afforded, 

if any, under the patchwork system of state regulations. 

And as we will hear from our witnesses today, due to the regulatory uncertainty created by that 2011 decision, the Internet has 

effectively turned into the Wild West for online gaming. Not only 

does it present an opportunity for criminals and terrorist organizations to launder money with transactions happening under the 

radar, but there are issues of cheating and identity theft without 

any recourse for consumers. There are also little, if any, regulatory 

standards required by these websites to securely ensure those who 

are playing the game are who they say they are, the age they say 

they are, and where they say they are. 

I believe that technology does exist that can meet this goal either 

through biometrics or geo-location data, and I look forward to seeing the presentation of such technology software from one of our 

4 

witnesses today. Such standards provide protections for all consumers, particularly underage and problem gamblers. We must, 

however, be able to account for the ever-changing technologies of 

the Internet. 

And finally, I believe that we need to examine whether or not 

law enforcement has the appropriate tools to either shut down or 

regulate the space. In the past, I have been vocal about my belief 

that law enforcement lacks the authority. Congress needs to provide clarity and guidance on these issues. If we do not, this illegal 

market will continue to grow where millions of consumers are put 

at risk, and criminals can act freely. 

I firmly believe that Congress has the unique opportunity to act 

by updating the Wire Act and clarifying other existing statutes 

that govern Internet gambling before it is too late and states become dependent on this new source of revenue. I also believe that 

Congress should examine the merits of providing a path forward 

for limited federally regulated online poker. Poker, a game of skill, 

not a game of chance, is different than other house bank games, 

such as blackjack or roulette. I believe that if given the opportunity, appropriate consumer protection standards could be in place 

to protect American consumers, while still providing for a play of 

this nationally-recognized peer-to-peer game. 

So with that, I again thank the Chairwoman for examining this 

issue today as important as it is may be to Nevada, it is to New 

Jersey, as it is to Mississippi, and frankly 48 out of 50 states. So 

thank you very much. And again, to our panelists for being here 

today, for your testimony and helping us better under the consumer issues that we are facing. I look forward to hearing from 

you. Thank you. 

Senator MCCASKILL. Thank you, Senator Heller. 

I welcome my colleague from Missouri. I am loathe to use the 

word ‘‘senior’’ at my age, so we try not to be senior or not senior. 

We just try to work together whenever we can, even though we 

have some policy disagreements from time to time. And I want to 

welcome Senator Schatz also for being here. I am happy to give 

each of you a minute or two if you would like to say anything before we begin with the witnesses. 

STATEMENT OF HON. ROY BLUNT, 

U.S. SENATOR FROM MISSOURI 

Senator BLUNT. I would just briefly say, Chairman, that I was 

in the House in 2006 when we passed the Unlawful Internet Enforcement Act. I supported it. It did lean heavily on the Wire Act 

and what we all thought at the time was the traditional and would 

be the ongoing interpretation of the Wire Act. And the new interpretation of that Act largely has opened the door, as both of you 

have well explained, to many unintended consequences. 

A state like ours that has a lottery, whatever they decide that 

they may be allowed to do, but they should not be competing with 

offshore competitors and competitors that are unlicensed, unregistered, unregulated. And so, I am grateful to both of you for having 

this hearing today. 

Senator MCCASKILL. Senator Schatz? 

5 

STATEMENT OF HON. BRIAN SCHATZ, 

U.S. SENATOR FROM HAWAII 

Senator SCHATZ. Thank you, Chairwoman McCaskill and Ranking Member Heller. Thank you for bringing this issue to the table. 

As you all know, the State of Hawaii prohibits all forms of gambling. This ban reflects my view and the view of our congressional 

delegation, and most of the popular will of the state of Hawaii. And 

so, I am particularly interested as we assess the need for new Federal and state regulatory policies, how that is going to intersect 

with the state of Hawaii and our stated public policy, because as 

you pointed out, Madam Chairwoman, it is not going to recognize 

any of our statutory jurisdiction in the state of Hawaii, because 

people can gamble from whatever device they choose to utilize. So, 

this is important for the state of Hawaii, although it has not quite 

the nexus that it has for the state of Nevada. 

Senator MCCASKILL. Thank you, Senator. I welcome our witnesses today. I will apologize now. I have another hearing that is 

an urgent matter for me that I will have to duck out for at some 

time during our proceedings this morning. It will be my intention 

to get—to time my leaving here so I can immediately do the questioning I need to do in that hearing, and immediately return so I 

will have an opportunity hopefully to ask questions. But I did not 

want any of you to think that if I leave before all of your testimony 

is finished that I am not interested and very engaged in this topic. 

When I leave, I will turn the Committee over to Senator Heller to 

chair in my absence, and I know he will do a great job at that. 

We welcome Mr. Chuck Canterbury, National President of the 

Fraternal Order of Police—I thank you for being here—Mr. Matt 

Smith, President of the Catholic Advocate here in Washington, 

D.C., Mr. Thomas A. Grissen, Chief Executive Officer of Daon—am 

I saying that correctly, Mr. Grissen? 

Mr. GRISSEN. That is right. 

Senator MCCASKILL. And Mr. Jack Blum, an attorney from Annapolis, Maryland. Thank you all for being here, and we will begin 

with you, Mr. Canterbury. Welcome. 

As a former prosecutor, I am always in uniform withdrawal, so 

I have great respect for all of you and your members, and look forward to your testimony. 

STATEMENT OF CHUCK CANTERBURY, NATIONAL PRESIDENT, 

FRATERNAL ORDER OF POLICE 

Mr. CANTERBURY. Good morning, Madam Chairman, Senator 

Heller, and other distinguished members of this Subcommittee on 

Consumer Protection, Product Safety, and Insurance. It seems like 

there is a plethora of former prosecutors in the Senate, and we always like coming to testify before the people that we have worked 

with at home. And we appreciate you holding this hearing. 

My name is Chuck Canterbury. I am the National President of 

the Fraternal Order of Police. We are the largest law enforcement 

labor organization in the United States representing over 330,000 

rank-and-file police officers in the country. Again, thank you for 

having us here this morning, and we would like to share the views 

of the FOP on the impact that Internet gaming may have on public 

safety and the need to update and modernize the Wire Act. 

6 

We are in a wireless age, and it is clear that the Wire Act is an 

old law ill-suited to addressing our new problems. The Interstate 

Wire Act was enacted in 1961. Well, in 1961 we were dealing with 

the Bay of Pigs, the Beatles were first performing in the United 

States, and our current President was born. The FOP strongly believes it is time for our nation’s legal framework to catch up to the 

technology that it seeks to regulate. 

In 2006, the FOP strongly supported the enactment of the Unlawful Internet Gaming or Gambling Enforcement Act. The law did 

not expand or redefine any criminal activity, but it did require financial transaction providers to block and refuse transactions associated with Internet gaming. The aim of this legislation was not 

only to enforce the existing laws, but also to help combat the use 

of offshore gambling operations that launder money from other 

criminal enterprises. 

In 2011, the Assistant Attorney General of the Criminal Division 

issued a Memorandum Opinion, which held that the Wire Act prohibited only sports betting and no other forms of online wagering. 

Overnight, the investigation of money laundering by organized 

crime and other unlawful enterprises became a lot more difficult. 

A 2012 report by the U.S. Department of State notes that the 

Internet gaming industry is laundering millions of dollars through 

Costa Rica, which has become a bridge country used to send money 

to and from other nations and other jurisdictions. I think it is telling that 4 of the 11 individuals indicted by the Department of Justice for operating online gaming sites listed their residence as 

Costa Rica. 

These 11 defendants were charged with violations of the UIGEA, 

and the Illegal Gambling Business Act, and the later Federal statute, which was adopted by Congress in 1970 in an effort to attack 

the profits of organized crime. However, the key component to this 

law is that there must be a state statute prohibiting the activity, 

which then allows the Federal Government to investigate and prosecute the case. 

Because of the differences in state law, there are cases in which 

Federal authorities would be precluded from using the IGBA to 

interdict unlawful activity from being considered in offshore sites. 

We know this for certain: organized crime is using offshore online 

operations to launder their profits. We also know that terrorist organizations are or could be using the same strategies to launder 

funds. 

According to the counterterrorist analysts at Jane’s Strategic Advisory Service, there are indications that terrorists in Afghanistan 

have been using illegal gaming sites to launder their money. And 

money laundering is hardly the only threat. Millions of Americans 

wager regularly on offshore Internet gambling sites beyond the 

reach of the Federal Government. Without the authority previously 

provided by the Wire Act, there is no legal or regulatory framework 

for law enforcement to shut down this illegal activity. 

These Americans will have no recourse if they become victims of 

fraud or other criminal acts. There is no enforcement mechanism 

to provide prompt and accurate payments, to prevent criminals 

from entering the marketplace, rigging games, taking advantage of 

7 

our children, or misusing customer identification and financial 

data. 

The FOP is not advocating for any expansion in what online 

gaming activity is deemed unlawful. With changes in how the Wire 

Act can be used, the limitations of both the UIGEA and IGBA, law 

enforcement in the United States does not have the means to effectively identify and shut down these operations. I believe U.S. law 

enforcement can rise to the challenge and successfully attack online fraud, money laundering, and illegal gaming. 

Frankly, it’s ridiculous that the Federal Government continues to 

regulate dynamic, ever-changing technology with legislation crafted 

more than five decades ago. It is vital we address this issue before 

we fall even further behind. 

Thank you very much for allowing us to be here today. 

[The prepared statement of Mr. Canterbury follows:] 

PREPARED STATEMENT OF CHUCK CANTERBURY, NATIONAL PRESIDENT, 

GRAND LODGE, FRATERNAL ORDER OF POLICE

Good morning, Madam Chairman, Senator Heller and the distinguished members 

of the Subcommittee on Consumer Protection, Product Safety and Insurance. My 

name is Chuck Canterbury, National President of the Fraternal Order of Police, the 

largest law enforcement labor organization in the United States, representing more 

than 330,000 rank-and-file police officers in every region of the country. 

I want to thank you for inviting me here this morning to share the views of the 

Fraternal Order of Police on the impact Internet gaming may have on public safety 

and the need to update and modernize the Wire Act. 

The 2011 Memorandum Opinion for the Assistant Attorney General of the Criminal Division in the U.S. Department of Justice held that the Wire Act of 1961 did 

not prohibit state lotteries from selling tickets online. It also reinterpreted the statute much more narrowly, holding that the Act only prohibited sports betting and 

not other forms of online wagering. 

We are in a wireless age and it is clear that the Wire Act is an old law ill-suited 

to addressing our new problems. The Interstate Wire Act was enacted in 1961—a 

time when the great-grandfather of the Internet, ARPANET, was still in its embryonic stage. The FOP strongly believes it is time for our nation’s legal framework to 

catch up to the technology it seeks to regulate. 

The FOP has been very active on these issues and we have repeatedly urged the 

Administration and Congress to work with us to update this law and give law enforcement the tools they need to successfully investigate and prosecute these crimes. 

In 2006, the FOP supported the enactment of the ‘‘Unlawful Internet Gambling 

Enforcement Act.’’ This law did not address expand or redefine any criminal activity 

but it did require financial transaction providers to block and refuse transactions 

associated with illegal gambling. The aim of law enforcement in supporting this legislation was not only to enforce existing gambling laws—like the Wire Act as it was 

interpreted and applied at that time—but also to help combat the use of these offshore gambling operations to launder money from other criminal enterprises. It is 

clear from testimonies given before Congress on this issue and the new application 

of the statute as interpreted by the Justice Department that law enforcement needs 

a better, clearer framework as well as new tools if we are to achieve these ends. 

Money laundering is hardly the only threat. Millions of Americans wager regularly on offshore Internet gambling sites beyond the reach of the Federal Government. Without the authority previously provided by the Wire Act, there is no legal 

or regulatory framework for law enforcement to shut down illegal activity and millions of Americans will have no recourse if they become the victims of fraud or other 

criminal acts to seek redress. There is no enforcement mechanism to provide prompt 

and accurate payments, to prevent criminals from entering the marketplace, rigging 

games, taking advantage of children, or misusing customer identification and financial data. 

The U.S. Department of State’s 2012 International Narcotics Control Strategy Report (INCSR) stated: 

While not a major regional financial center, Costa Rica remains vulnerable to 

money laundering and other financial crimes, including various schemes that 

8 

target U.S.-based victims. Money laundering activities are primarily related to 

the foreign proceeds of international trafficking in cocaine. A sizeable Internet 

gaming industry also launders millions of dollars in illicit proceeds through 

Costa Rica and offshore centers annually. 

The Costa Rican government reported that their nation is primarily used as a 

‘‘bridge’’ to send money to and from jurisdictions and other offshore financial centers. The State Department noted several obstacles preventing the Costa Rican government from properly investigating and prosecuting money laundering offenses by 

not fully utilizing law enforcement tools like cooperating witnesses, confidential informants, electronic surveillance and undercover operations. In addition, money 

laundering cannot be charged as an additional offense to another crime in Costa 

Rica. You can prosecute and convict an individual for narcotics trafficking, but then 

they cannot also be charged with laundering the profits from the drug sales. 

Organized criminals engaged in money laundering know that they can exploit 

these shortcomings in countries like Costa Rica, which is why they set up shop 

there. This is starkly demonstrated by the fact that 4 of the 11 individuals indicted 

by the U.S. Department of Justice for operating online gaming sites listed their residence as Costa Rica. 

These 11 defendants were charged for violations of UIGEA and the Illegal Gambling Business Act (IGBA). The latter Federal statute was adopted by Congress in 

1970 in an effort to attack the profits of organized crime. Apart from the individual 

making the wager, the statute allows any person that plays a role in the business 

or organization of conducting a gambling business to be charged with violating or 

conspiring to violate the Act. A key component to this law, however, is that there 

must be a State statute prohibiting the activity, which then would allow the Federal 

Government to investigate and prosecute the case. 

The IGBA does provide law enforcement with some means to investigate organized money laundering based offshore. It also presents some questions about the 

reach of the law because the activation of the statute is dependent upon the state 

law. The indictments I mentioned earlier were brought using the State of New York, 

which defines gambling as taking place based on the location of the bettor. In other 

states, bettors may be able to call-in their wagers to an offshore bookmaker and not 

be in violation of state law, thus precluding the Federal Government from using the 

IGBA to go after these criminal enterprises. 

Recent reports and investigations in Europe demonstrate that organized crime in 

Italy is laundering what one law enforcement official described as ‘‘enormous 

amounts of money’’ using online gaming sites in Germany. In 2007, the individual 

German states took over regulation of gambling, but there are no criminal penalties 

for using or operating an illegal gambling site. The illegal online gaming market is 

booming in Germany and criminal enterprises are taking advantage of it. 

We know this for certain: organized crime is using offshore online operations to 

launder their profits. We also know that terrorist organizations are or could be 

using the same strategies to launder funds. According to counterterrorist analysts 

at Jane’s Strategic Advisory Service, there are indications that terrorists in Afghanistan have been using illegal gaming sites to launder their money. 

Illegal profits from unlawful activities are not of much use to criminal operations 

unless the money can be cleaned through legitimate channels. Without money laundering, organized crime could not exist. With changes in the how the Wire Act can 

be used, the limitations of both the UIGEA and IGBA, law enforcement in the 

United States does not have the means to effectively identify and shut down these 

operations. 

The FOP is not advocating for any expansion in defining what online gaming activity is deemed unlawful. This was the position we took when we supported UIGEA 

and it is the position we still hold. 

I believe U.S. law enforcement can rise to the challenge and successfully attack 

online fraud, money laundering and illegal gaming. Frankly, it is ridiculous that the 

Federal Government continues to regulate dynamic, ever-changing technology with 

legislation crafted in 1961. In 1961, we were dealing with the Bay of Pigs, the 

Beatles were first preforming and President Obama was born. Time certainly has 

marched forward and it is vital we address this issue before we fall even further 

behind. Continuing to wait on this issue will only cause it to become more serious. 

We need Congress and the Administration to work with Federal, state and local 

law enforcement to devise an enforcement and regulator framework that will allow 

us to identify and go after organizations and businesses that are participating in 

or funding illegal activity. I am confident that we can do that if we work together. 

I want to thank you again, Madam Chairman and Senator Heller, for the invitation to testify here today and I am ready to answer any questions you may have. 

9 

Senator MCCASKILL. Thank you, Mr. Canterbury. 

We welcome Mr. Matt Smith from the Catholic Advocate. Thank 

you, Mr. Smith. 

STATEMENT OF MATT SMITH, PRESIDENT, 

CATHOLIC ADVOCATE 

Mr. SMITH. Thank you, Madam Chairman and Senators. Nearly 

7 years ago, Congress voted overwhelmingly to protect vulnerable 

communities within our country, as well as the integrity of professional sports, by stopping the expansion of gambling on the Internet. Unfortunately, Congress’ clear intent in the Unlawful Internet 

Gambling Act of 2006, UIGEA, is now under assault. 

At the behest of two state lotteries 2 days before Christmas, as 

Senator Heller already stated, the Justice Department announced 

it was upending more than five decades of consistent interpretation 

of the Wire Act, which prohibited all gambling over the Internet, 

with a new unilateral opinion that the law simply applied to online 

sports gambling. The Department of Justice’s floodgates, as Senator Heller also stated, have opened the floodgates for states to accelerate plans, many already underway, to go even beyond ticket 

sales to offer casino-like games on the Internet under the umbrella 

of their State lottery. 

The CEO of the leading provider of lottery services in the United 

States was quoted saying, ‘‘The DOJ ruling does not limit the sale 

of authorized products solely to State lotteries. I think it’s possible 

that if lotteries are B-to-market, they could be tarnished by the 

early entrance and also risk the ability to attract younger players.’’ 

It is those younger players and other vulnerable populations, like 

seniors, who are most at risk. Ninety-three percent of teens aged 

12 to 17 utilize the Internet, and 97 percent of teens of the same 

age participate in some form of online gaming, making them attractive targets for gambling marketing, as well as illegal and fraudulent operators. 

By reinstating the more than 50-year interpretation of the Wire 

Act and strengthening UIGEA, you can protect our children and 

families from the erosion of safeguards Congress has previously established. 

We recognize Congress did not create this problem, but here is 

an opportunity to address an impending matter before it becomes 

a crisis. Congress has the power to protect our seniors, our children, and give law enforcement the tools they need to protect the 

vulnerable from illegal predatory gambling interests. We urge bipartisan congressional action to restrict the imminent expansion of 

online gambling throughout states, lotteries, and offshore operators, and believe Federal restriction of online gambling is vital, urgent, and consistent with congressional intent. 

Thank you. 

[The prepared statement of Mr. Smith follows:] 

PREPARED STATEMENT OF MATT SMITH, PRESIDENT, CATHOLIC ADVOCATE

Nearly seven years ago, Congress voted overwhelmingly to protect vulnerable 

communities within our country as well as the integrity of professional sports by 

stopping the expansion of gambling on the Internet. Unfortunately Congress’ clear 

intent in the Unlawful Internet Gambling Act of 2006 (UIGEA) is now under assault. 

10 

A pro-Internet gambling coalition of large states desperate for more revenue and 

foreign-owned gambling companies have lobbied the Executive Branch to get around 

Congress’ intended protections and, at the end of 2011, they received an extraordinary boost from an unlikely source: the U.S. Department of Justice. On Friday, 

December 23, 2011, the Justice Department (DOJ) announced it was upending more 

than five decades of consistent interpretation of the 1961 Wire Act which prohibited 

all gambling over the Internet with a new, unilateral opinion that the law simply 

applied to online sports gambling. 

The Wall Street Journal described what happened next: ‘‘When the U.S. Justice 

Department in December narrowed its interpretation of the 50-year-old Wire Act, 

saying it banned only sports betting and not other forms of online gambling, the decision sparked hope in state capitals that lotteries could start selling tickets online 

and lead a charge into online gambling.’’ The ‘‘charge into online gambling’’ was exactly what Congress intended to prevent—with very good reason. 

DOJ’s determination has opened the flood gates for states to accelerate plans, 

many already underway, to go even beyond ticket sales to offer casino-like games 

on the Internet under the umbrella of their state lottery system. Several states have 

either passed online gambling statutes or are in the process of passing them quickly 

in upcoming sessions to take advantage of the Department of Justice ruling. 

The CEO of the leading provider of lottery services in the United States has said, 

‘‘The DOJ ruling does not limit the sale of authorized products solely to state lotteries. I think it’s possible that if lotteries are beat to market, they could be tarnished by the early entrants and also risk losing the ability to attract younger players.’’ 

It’s those ‘‘younger players’’ and other vulnerable populations like seniors who are 

at the most serious risk. Ninety-three percent (93 percent) of teens age 12–17 utilize 

the Internet and 97 percent of teens of the same age participate in some form of 

online gaming making them attractive targets for gambling marketing as well as 

illegal and fraudulent operators. 

Often, Congress is put in situations where issues that are already problems require solutions. Here is an opportunity to address an impending matter before it becomes a crisis. Congress still can act to reassert its authority and re-establish its 

intent to prevent the proliferation of online gambling in the U.S. By reinstating the 

more than 50-year old interpretation of the Wire Act and actually strengthening 

UIGEA, you can protect our children and families from the erosion of safeguards 

Congress has previously established. 

We recognize Congress did not create this problem. Congress, though, does have 

the power to protect our seniors, our children, and give law enforcement the tools 

they need to protect the vulnerable from illegal predatory gambling interests. We 

urge bi-partisan congressional action to restrict the imminent expansion of online 

gambling throughout states, lotteries, and off-shore operators. Federal restriction of 

online gambling is vital, urgent, and consistent with recent congressional intent. 

Senator MCCASKILL. Thank you, Mr. Smith. 

We will now hear from Mr. Blum. Thank you very much for 

being here. 

STATEMENT OF JACK A. BLUM, ESQ. 

Mr. BLUM. Thank you, Senator. My name is Jack Blum. I am a 

Washington, D.C. attorney, and I specialize in money laundering 

compliance, offshore tax evasion, and financial crime. I am here 

this morning at the request of the Committee. I have no client interest at all in the gambling business. I think gambling is dumb, 

I do not do it, and so much for that. 

Gambling and organized crime have quite a history, and I think 

it is worth spending a minute on that history because it is the origin of the Wire Act, and it is the heart of one of the big problems 

we are facing. 

Al Capone got caught for income tax evasion, and Meyer Lansky 

was a man who solved the problem for organized crime way back 

when. And his idea was to own a racetrack, and use the racetrack 

as a way of legitimizing the take from organized crime. He got the 

Batista regime in Cuba to give him control of the racetracks, and 

11 

all of the organized crime money from the East Coast went into 

banks in Florida, essentially as winnings from the Cuban tracks. 

I saw the same thing go on again in the Caribbean when I worked 

on the island of St. Maarten, and I saw planeloads of cash coming 

into the airport in St. Maarten going into the bank, being deposited 

by an Italian Mafioso, who then controlled all of the casinos on the 

island. His idea was this is winnings from the casino, and, of 

course, if you went into the casinos, there were no customers there. 

But that was not why the casinos existed. 

So, the question of who owns a casino is pivotal, and that is why 

casinos have to be licensed, and that is why states, like Nevada, 

New Jersey, who have brick and mortar casinos, go through a very 

vigorous and rigorous process of licensing casino owners. Now, I 

think that the problem of going on the Internet has made the issue 

of licensing even more important. Who is it that has this Internet 

casino? Is it someone legitimate? And here, the problem is they can 

operate from anywhere, and I really cannot fathom how any states 

can control something that operates that way from anywhere in 

any jurisdiction. 

The offshore casinos have figured out how to evade U.S. law. 

They have been doing it for a long time. If you want to take a look 

at it, all you have to do is go on the web and do a search. And now 

on top of everything else, we have an artificial currency called ‘‘BitCoin,’’ which could even take it out of the realm of being able to 

police it through the banking system. 

I began to look into one aspect of this for part of the Federal 

Government, which is the offshore merchant business, and we were 

trying to figure out how people were using offshore accounts to 

evade taxes. We discovered that there were service companies in 

places like Bermuda and elsewhere that were offering completely 

set up online casinos to people, and these casinos were part of what 

were called, ‘‘protected shell corporations.’’ The protected shell corporations had no visible owners. If you went to Bermuda, all you 

could find would be the parent company of the protected shell, 

which actually had the bank account, and there would be no way 

of getting to the person who really owned the casino. That is, from 

a regulatory point of view, a complete nightmare. 

In truth, the casino is a bank. Any business organization that 

has an encrypted switch and can take open accounts, take money, 

and send money, is operating as a bank. And as a bank, it comes 

under the Bank Secrecy Act and all of the rules regarding money 

laundering. 

So the question is, how do you now regulate these online casinos 

in any meaningful way, and how do you apply the Bank Secrecy 

Act to it? We are currently having a huge problem with our regular 

banks, getting them to comply with money laundering laws. I am 

sure you have all seen the accounts of HSBC, a major international 

bank, laundering $4 trillion. If the Treasury Department is having 

a problem with HSBC, how is it going to handle the Internet gaming industry, which is sprawling and global? 

Up until now, it has been the banking industry which has controlled the offshore gaming industry. And the way that worked was 

the prohibitions of the Uniform Act, which said banks really were 

the ones who were responsible for preventing the opening of acVerDate Nov 24 2008 09:35 Sep 24, 2013 Jkt 075679 PO 00000 Frm 00015 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\82840.TXT JACKIE
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counts without knowing your customer, without being sure that the 

customer was legitimate. Now that that Act has been undermined, 

the banks are wide open to accept these customers without the 

kinds of money laundering controls that previously existed. 

My belief is the only way we can get on top of this is to have 

a regulatory agency at the Federal level that licenses online casinos 

where casinos are prohibited—foreign casinos are prohibited from 

operating in the U.S., and any U.S. player who uses one is subject 

to penalty. And that way, we might possibly be able to both tax 

and control the bad behavior of the people who want to use casinos 

to launder money. 

My special concern is that some of this casino operation could be 

used to move funds from the United States to a foreign destination. 

Gambler in the U.S. sets up an account, puts money in the account. 

The unscrupulous casino operator sends the money to another account in an offshore location. Likewise the money could be moved 

back exactly the same way. 

We really have to have comprehensive Federal regulation, sophisticated Federal regulation, and it should happen sooner rather 

than later because, as I say in my prepared testimony, the cat is 

out of the bag. 

Thank you. 

[The prepared statement of Mr. Blum follows:] 

PREPARED STATEMENT OF JACK A. BLUM, ESQ. 

My name is Jack A. Blum. I am a Washington, D.C. lawyer specializing in money 

laundering compliance, offshore tax evasion and financial crime. I am appearing 

here this morning at the request of the Committee. I do not have clients with an 

interest in Internet gambling. Personally, I think gambling is dumb and I learned 

early on that the house always wins. 

Gambling and organized crime have had a long standing relationship. When the 

Justice Department nailed Al Capone it was for tax evasion. The financial wizard 

of organized crime, Meyer Lansky, understood that criminal proceeds had to be legitimized. He taught the criminal world that the best way to do it was to own either 

a race track or a gambling casino. Lansky gained control of Cuba’s race tracks before the outbreak of World War II. The East Coast’s organized crime families deposited their profits from prostitution, illegal gambling, and drugs in the Cuban race 

track’s bank accounts in Florida as the track’s take on the pari-mutuel betting in 

Cuba. Magically, criminal proceeds from the U.S. East Coast became legitmate race 

track profits from Havana. 

In the early 1990s I was hired to investigate money laundering on the Caribbean 

island of St. Maarten. An Italian with organized crime connections had taken over 

the island casino business. Each day the casinos deposited large amounts of cash 

as the ‘‘house take.’’ In fact when I visited the casinos there were very few customers and hardly enough activity to bother keeping the doors open. I found the explanation at the St. Maarten airport where each day flights would arrive from San 

Juan and Miami and would be met by armored cars. Mailbags of cash were 

offloaded and taken to the banks to be deposited as gambling winnings. The Dutch 

Ministry of Justice and the DEA broke the mafia hold on the island and the laundering stopped—at least for a while. 

The moral of these stories is simple—casino ownership and operation must be regulated. Casino books need to be audited and the gaming should be supervised to 

prevent buying and selling chips from becoming another way of laundering cash and 

to prevent the casino being used to cover large criminal money movements. The 

states that got into the business early, Nevada and New Jersey learned their regulatory lessons the hard way and established respected regulatory organizations. 

Other states followed suit and as long a gambling was tied to bricks and mortar 

the problems were manageable. 

Unfortunately, the development of the Internet and global electronic commerce 

has made serious control of gambling very difficult. In the new world of electronic 

commerce the definition of a financial institution has become any business enterVerDate Nov 24 2008 09:35 Sep 24, 2013 Jkt 075679 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\82840.TXT JACKIE
13 

prise that has an encrypted switch—that is to say it has customer accounts from 

which funds come and go and which are protected through some form of encryption. 

Functionally an online casino is no different than a bank even though its purpose 

is different. It has customer accounts that have balances. Customers can add or 

withdraw money at will, and if the operator is willing, balances can be transferred 

from one account to another. It stands to reason that a casino should have the same 

anti-money laundering controls that banks have. Casinos should be required to 

know their customers, they should be required to monitor accounts for suspicious 

transactions, and casinos should be audited for the protection of customers and to 

insure compliance with the anti-money laundering regime. 

Online casinos can operate from any jurisdiction. Offshore casinos have developed 

sophisticated methods of avoiding supervision and U.S. law. I suspect more than a 

few of the existing offshore casinos have money laundering and illicit funds transfer 

as their principal purpose. 

To make matters worse we now must confront the use of artificial currency such 

as the Bitcoin that is beyond the reach of governments. 

As part of a consulting assignment for a Federal agency I began to look into what 

is called the offshore merchant business. The idea behind becoming an offshore merchant was that a business based on the Internet could direct all customer payments 

for services in the U.S. to an offshore account that would accept credit cards. The 

funds would be untraceable and the offshore merchant would thus avoid showing 

income in the U.S. and evade Federal and state tax. 

To make the offshore operation opaque service providers in offshore jurisdictions 

offered ‘‘cells’’ in what are called protected cell companies. These companies have an 

overarching company with bank accounts and a visible identity, but they are made 

up of individual cells, each with a different owner, and each financially independent 

of the other. There is no way for foreign law enforcement to find the ownership of 

the individual cell companies. Even the local governments do not know the owners 

of the cells. 

Protected cells are just one of a number of ways of hiding financial operations offshore. Untraceable shell companies, trusts and other devices are in widespread use. 

Indeed, Senator Levin has introduced legislation aimed at putting an end to anonymous corporations here in the U.S.—legislation that I strongly support. 

In doing my research, I found several service providers who offered casino gambling site software with a full complement of games and the ability to set up individual customer accounts. By the way—many of these same service providers also 

offered pornographic sites protected by a pay firewall. The software is designed to 

be controlled by an individual cell company far out of reach of regulation, taxation, 

and prosecution for fraud. 

Congressional efforts at controlling offshore online gambling activities have met 

with limited success. The principal piece of legislation in this area is the 2006 Unlawful Internet Gambling Enforcement Act. That Act bars the use of checks and 

credit cards in payment for illegal gambling activities. The word is ‘‘illegal.’’ The definition of illegal was based on the Wire Act of 1961 that banned the use of interstate 

wire communications for both sports and no-sports gambling. The ban on the use 

of payment systems put the banks in the business of policing customers to make 

sure the only online firms that used bank accounts and credit cards were offering 

‘‘legal’’ gambling services—that is to say gambling allowed by state law. 

The one prosecution and conviction of note under the UIGEA targeted the operators of a sports book based in Antigua that accepted bets from U.S. persons. The 

operators of the sports book, Daniel Eremian and Todd Lyons, operated openly and 

flamboyantly, almost daring the Department of Justice to prosecute. Most likely at 

their instigation the government of Antigua filed a complaint against the United 

States under the WTO rules. Antigua claimed that the U.S. law aimed at their offshore casinos was an act of trade discrimination. 

As the prosecution of Sports Offshore was taking place, the Department of Justice 

changed its interpretation of the Wire Act. It said that the Act only applied to sports 

betting. The Justice opinion ended the effectiveness of the ban on bank transfers 

and credit cards for casinos that limited themselves to electronic table games and 

slots and left the field wide open for gambling websites. After the DOJ opinion, 

websites that offered casino games that were now considered legal could use bank 

payment systems. 

To the extent that the controls on payments for online gambling worked, they 

kept American customers away from the offshore sites. The Justice Department decision to give up on the control of interstate gambling other that sports gambling 

has opened the door wide to any entrepreneur legitimate or otherwise who wants 

to get in the business. It tore up the Wire Act—an Act that was the result of extensive hearings on organized crime and gambling by Senator Estes Kefauver and the 

14 

Senate Permanent Investigations Subcommittee. It left behind a maze of state laws 

and no real way of regulating the Internet gambling business. 

The current situation raises the question of whether there will be any controls on 

the business of Internet gambling or whether we will go back to the days of Al 

Capone and Meyer Lansky. To prevent money laundering through an Internet site 

the sites will have to be licensed, audited, and regulated. The applicants for a license will have to be screened for fitness and to ensure they do not have criminal 

pasts or criminal connections. The operations will have to be audited to insure that 

the stated earnings in fact come from ‘‘house’’ winnings. Customers will have to be 

subjected to due diligence under ‘know your customer’ rules. Casino operators will 

have to file suspicious activity reports on customer accounts with the Treasury’s 

FINCEN. They will have to be audited to insure the suspicious activity reports are 

in fact filed and that the operators are screening customers and the activity in customer accounts. 

There will also have to be systems to insure that winnings are reported to IRS 

and taxes are paid. 

Finally, the auditors will have to insure that the online casinos do not become sophisticated money transfer systems—a kind of online Hawala exchange. An unscrupulous operator could take funds from a U.S. gambler, and pay ‘‘winnings’’ to a foreign player’s account. Or the money could move from an offshore player to an onshore player. The possibilities for terrorist financing and for moving the proceeds 

of white collar crime using this system are endless. 

What part of government will take on the regulatory responsibility? What part of 

the government is equipped to supervise a sophisticated and very large financial industry? Most certainly it cannot be the IRS—an agency that has had its budget cut 

three times in the past three years and has been given the added responsibility of 

implementing the new healthcare legislation. You will have to create a new specialized regulatory agency, perhaps as a part of the Treasury Department that will take 

on the job. 

The regulatory problem cannot be solved by a software system alone no matter 

how sophisticated the system is. Screening systems all require human intervention 

to screen the computer search results and to integrate the results in ways that lead 

to enforcement action. Moreover we have all seen what happens when a financial 

institution, which a casino is, gives up on its regulatory responsibility. The example 

I have in mind is HSBC which laundered four trillion dollars in drug money, computer screening systems notwithstanding. 

I believe that the new regulatory agency Congress will have to create will have 

to be staffed by experts with the resources to do the hard work of keeping the industry honest. I do not think this kind of regulation can be done at the state level. The 

regulation will be expensive and the industry will have to be taxed to pay for regulation. 

I do not believe prohibiting Internet gambling will work. The horse has left the 

barn. The Internet is too open to control and in any event controls will not work 

across state and national borders. What we have to hope is that a new Federal 

agency can inspire enough trust to encourage customers to use U.S. sites, and that 

competitors will report problem sites to the regulators and the law enforcement authorities. The regulators will also have to screen the Internet regularly for pop-up 

casino sites that are attempting to avoid controls. There will have to be limits 

placed on bank transfers to offshore casinos. 

You will have to address the issue of online gambling one way or another. The 

sooner the problem is addressed the better because the present situation is out of 

control. A simple Internet search for online casinos will show you how many players 

have entered the field. Crafting appropriate legislation will take a concerted effort 

by Congress with the help of the agencies now tasked with money laundering prevention. 

I hope you have found this testimony helpful and I will be happy to answer any 

questions you may have. 

Senator MCCASKILL. Thank you, Mr. Blum. And all of your statements will be included in the record. 

Mr. BLUM. Thank you. 

Senator MCCASKILL. Mr. Grissen? 

15 

STATEMENT OF THOMAS A. GRISSEN, 

CHIEF EXECUTIVE OFFICER, DAON 

Mr. GRISSEN. Thank you, Madam Chair, Ranking Member Heller, and other members of the Subcommittee. I appreciate the opportunity to testify and discuss some of the topics in front of this 

committee. You have my written testimony. I hope you find today’s 

demonstration valuable. I appreciate your insight to see the new 

innovative technologies. 

I will just take a few seconds to make three points prior to proceeding with the demonstration. The first point is that I am not a 

proponent or an opponent to Internet gaming. My focus is on technology and establishing trust on the Internet and those people that 

interact online. I do share your concerns about the developments 

that are occurring in the states. 

The second point would be that there is a much broader consumer protection concern that spans all industries, not just Internet gambling. You may have seen today’s USA Today. Colleges are 

struggling with online courses to make sure that the person enrolled and that is doing the homework, is the same person who 

takes the exam, so the concerns are widespread. 

And this all comes back down to establishing a means of trust, 

so how do we know that the person we are interacting with are 

who they claim to be, and how do I protect and assert my identity? 

Other industries are moving forward. Probably one of the first 

adopters of the technology would be banking. Their concerns are 

both in terms of differentiating the brand, but also security fraud 

and regulatory compliance. These industries are adopting new technologies, including biometrics, and biometrics are just factors that 

are uniquely you. Your voice would be different than my voice. 

Your face would be different than my face. Your fingerprint would 

be different than mine. So there are human characteristics that are 

uniquely you. 

We all know that passwords are inadequate to serve these concerns. These comments, and the inadequacy of passwords have 

been expressed by everybody, including the President of the United 

States. We need to move forward to new technologies. 

And with that, I would like to proceed with my demonstration. 

[See Exhibit B on pages 45 and 46]. 

For the demonstration, I am just going to use a standard Apple 

device, and on the device is a series of applications. The application 

I am going to choose is a banking application, but it could be anything. The menu presents me with options. In this case, I am going 

to select a second option, which is a transfer of funds. 

I will transfer funds between a savings account and a checking 

account, and I am going to choose to transfer a substantial portion 

of funds. Let us say I am going to transfer $15,000 to my son for 

his college tuition, so I select ‘‘transfer.’’ It is asking me to confirm 

that transaction. I choose to confirm the transaction, and the system, based on the policy, is asking me first for a PIN, so I enter 

my PIN. It is now saying that the transaction is of some consequence to me, and what I would like to do is verify that you really are who you claim to be as opposed to just something I know. 

It is asking me to take a photograph, which I will do. There could 

be jokes about that. I am sorry you are laughing at my imagery, 

16 

but I am submitting the photograph. And again, because of the considerations of the sum of monies involved, it is asking me to speak 

a phrase. I am going to speak this phrase. My identity is secure 

because my voice is my passport. Verify me. 

And what it is doing is taking all those identity attributes, it is 

encrypting them, it is sending them off to the server, it is matching 

them against an enrollment record, it is verifying mathematically 

that it is me in each of those attributes. My face, my voice, the 

PIN, the crypto keys on the phone match the enrolled identity. It 

is confirming the transaction, and it is establishing online trust. 

That would be the consumer experience. These are the technologies 

being rolled out by banks as we speak. And you will see them 

adopted in other industries. 

Now there is another important role associated with this technology, and that is of a regulator or an operator. I am going to select a different application, and this would be a command center. 

So this would be the back-end technology. 

‘‘My identity is secure because my voice is my passport. Verify 

me.’’ 

That would be the verification I just went through. And so, you 

would have a forensic audit trail of each and every transaction. 

And on the top half of your screen, you see a variety of transfers 

for each transaction or identity event I ever undertook. I would be 

able to verify the biometrics associated with those identity events, 

including my face, my voice. And I would also be able to see other 

information on the transaction, including the location of the transaction and where it occurred. In this case, for the back-end operator, to save time in this hearing, this transaction was performed 

earlier this week and we just took the screen images of it, so that 

actually did not go into the back end of the system. 

The design of the system is to take a tool that consumers have, 

love, use, very convenient, and couple that with powerful technologies designed to establish trust between an identity event online and the individual doing it, and then to use the back-end command center allowing a regulator to investigate any transaction 

they wanted. 

Thank you very much. 

[The prepared statement of Mr. Grissen follows:] 

PREPARED STATEMENT OF TOM GRISSEN, CHIEF EXECUTIVE OFFICER, DAON

Thank you, Chair McCaskill, Ranking Member Heller, and members of the Subcommittee, for giving me the opportunity to testify today on this important topic. 

My name is Tom Grissen and I am the CEO of Daon, a leading provider of identity 

assurance, identification and verification software services worldwide. Our customers include the Departments of Commerce and Homeland Security, two of the 

largest American banks and many other large, private corporations, most of our Nation’s airports and maritime ports, the EU, Japan, Australia and many other countries around the world. 

I will argue that the tools we have been relying on to address cyber security are 

inadequate. I hope to persuade you that there is a new kind of solution that will 

fix the broken trust model of the Internet. As we speak, these technologies are being 

deployed across some of the most sophisticated financial institutions in the world. 

Over the next five minutes of my testimony a drama will be playing out across 

the Internet. Hundreds of millions of Internet transactions will occur touching nearly every aspect of one’s life. 

We will demonstrate the relevance of new technology through obvious applications 

in banking. At the same time the technology can be applied in ways that one can 

17 

scarcely imagine across industries such as health care, social networking and online 

gaming. 

The crux of the problem across all these industries is that we cannot effectively 

identify the individuals with whom we interact online. 

We have all enjoyed the eye opening experiences of the Internet. We all went online to browse websites and found innovative companies such as Netscape. Then we 

found the wonderful advancements in search and benefited from great companies 

such as Google. Next we placed our digital lifestyle on the Internet through companies such as Facebook who tapped into our desire to SHARE. What is missing is 

an effective means of establishing online trust. Technologies similar to what you will 

see today address this daunting problem. 

The inadequacy of the tools to establish online trust is understood by everyone, 

including the President of the United States. In the current online environment, individuals are asked to maintain dozens of different usernames and passwords, one 

for each website with which they interact. Passwords have served us well, but were 

invented in the 1960s. The complexity of this approach is a burden to individuals 

and encourages bad behavior—like the reuse of passwords—that makes online fraud 

and identity theft easier. Challenge response technologies are being defeated by social engineering. They all depend on ‘‘what someone knows’’ rather than ‘‘who you 

are.’’ 

Daon develops software that binds the person to the event through the use of factors, including biometrics. Biometrics are simply human characteristics that are 

uniquely you, such as your voice, face, palm, fingerprint, etc. 

Using your smart phones, PCs or tablets, these software technologies empower 

you to securely establish your identity through a combination of encryption, PIN/ 

passphrase entry, location-based technology, and biometrics such as voice, face and 

palm image matching. These technologies are a fully mobile, private and cost effective solution based on technology (e.g., smart phones) that consumer’s use and enjoy. 

I am neither a proponent nor an opponent of Internet gambling. However, there 

are many parallels between Internet gambling and what Daon does for our clients 

in terms of the trust relationships with customers and the governmental oversight 

of various activities (e.g., financial services). Over the past two years we have been 

monitoring the development of this issue before Congress. Absent congressional action or a uniform set of national standards for this particular Internet activity, various states have authorized various forms of Internet gambling. We have watched 

as states such as Illinois, Nevada, New Jersey and Delaware have either rolled out 

or are preparing to roll out Internet gambling with different kinds of standards for 

age verification, location verification and fraud prevention. 

I am thoroughly convinced, particularly in the wake of the December 2011 Justice 

Department decision about the inapplicability of the Federal Wire Act to most forms 

of Internet gambling, that continued congressional inaction on this issue is not acceptable. 

The risks associated with Internet gambling—and in particular, Internet gambling that is either unregulated or insufficiently regulated—are well-appreciated. 

These include: 

• Gambling by minors; 

• Defrauding of consumers by site operators; 

• Defrauding of players by other players; 

• Money laundering by either operators or players; 

• Violations of jurisdictional restrictions or prohibitions; 

• Breaches of data confidentiality and other security failures; and, 

• Problem or excessive gambling. 

Despite the recent indictments of several prominent offshore poker operators, no 

one can seriously challenge the fact that Americans, young and old, are finding 

ways to gamble on illegal offshore sites—some estimates put the markets at several 

billion dollars. But illegal offshore sites are only part of the problem, as the states, 

in the wake of the DOJ decision, are pursuing their own Internet gambling ventures. For example, the Illinois Lottery has been selling tickets online since March 

2012. Georgia has sold lottery tickets online since November 2012. Legal online 

poker has taken place in Nevada since April 2013. Delaware has approved Internet 

casino-style gambling and its system is expected to be operational by October. My 

understanding is that Internet gambling of all kinds will go live in New Jersey this 

November. 

There are many other states weighing proposals of one kind or another to legalize 

Internet gambling (See Exhibit A for a discussion of Internet gambling legalization 

18 

across the U.S.). While all of these states have some standards to deal with identifying customers and other regulatory issues, both the existing Internet gambling 

states and the prospective Internet gambling states share one common attribute: in 

no jurisdiction is state-of-the-art ‘‘Know Your Customer’’ technology in place or required to adequately mitigate the risks of Internet gambling. In other words, no one 

has technological requirements in place to ensure that a minor is not playing on a 

stolen parent’s credit card and PIN; that it’s a human being you’re playing against, 

not a robot; or that a player is actually physically located in a jurisdiction that permits Internet gambling. 

Satisfying these requirements means employing systems already in place for 

many sensitive e-commerce and security applications. Exhibit B provides screen 

shots demonstrating how the systems work. 

As the Internet by its very nature transcends intrastate commerce and is truly 

interstate, establishing our nation’s policies on Internet gambling is the responsibility of the Congress. Whether the policy is prohibition, limitations or some combination, is your choice. But, given the current proliferation in the states, I believe 

that one appropriate role for the Congress—and I believe the time is ripe for Congress to exercise this role—would be to set certain strict, minimum standards for 

identity assurance, identification, and verification for Internet gambling should the 

states be permitted to offer it in the first place. Nothing in the track record thus 

far suggests that states will apply such standards of their own volition, and it’s time 

Congress stepped up to the plate. 

Thank you again for the opportunity to testify and I look forward to your questions. 

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Senator MCCASKILL. Thank you. It is fascinating, but clearly this 

has not been adapted mainstream yet. I am not aware of anywhere 

that I do business that this technology is available. 

So, the first question that comes to mind is, let us assume that 

there are online gaming entities that are identified and by state 

gaming authorities or, if we do Federal regulations, Federal gaming authorities. Is it your testimony that what we do is require that 

the only way you could do online gaming would be if, A, the online 

gaming entity had this technology, and, B, the people who wanted 

to play poker online would have to have an iPad that could take 

their picture and listen to their voice, or a computer that would do 

that? 

Mr. GRISSEN. Sure, two great questions. The first question is related to the awareness of it, the technology is in the marketplace. 

As we speak, it is being rolled out by banks. It is being distributed 

in consumer security marketplaces in 15 countries around the 

world, 17 languages. It is part of the NIST program with the Department of Commerce, the National Strategy for Trust Identities 

in Cyberspace. 

And the second part of the question is, would we require it. Biometrics are a very powerful tool, and it would be my recommendation that these types of technologies should be adopted as they are 

being adopted in other industries. And it does not require an iPad. 

It could be any device: Android, Apple, tablet, or smartphone. It 

would require a device with the capabilities to have a camera, 

which most do, have location-based capabilities within them, and 

a microphone. 

Senator MCCASKILL. Well, it certainly adds a new wrinkle to the 

gazillion people who have tweeted at me over the last 10 days. I 

do not know how they are all going to feel about not being able to 


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47 

play online poker if they are not willing to take their picture every 

time they log in. And so, you are going to have some real friction 

between—because a lot of the people who want to play online poker 

are attracted to it because they do not want to do it in public. They 

do want to go to a brick and mortar place either for the convenience or for the privacy. 

So it is a fascinating—you know, obviously I am respectful of the 

technology, but the question is, it creates a real friction between 

those people who want privacy in this age that we are talking 

about, big data, and we are talking about NSA capabilities, and we 

are talking about what people know about you based on what you 

click, or whether you have GPS on. It is fascinating that we would 

open a whole new treasure trove of data. And I trust that you say 

that it is encrypted. 

But do any of the three of you have a comment on this as to 

whether or not you think this technology would alleviate some of 

the concerns that you have expressed about online gaming, particularly as it relates to the people that will flock to this in order to 

make a quick dollar, and then switch an ID address? 

Mr. BLUM. I think that identifying who the customer is is very 

important. It is part of money laundering rolls. But the reason you 

have to know your customer regulations in the banking system is 

to be able to figure out whether the transactions that are going forward are appropriate or not. And this does not begin to address 

that kind of question. 

So a bank wants to know who you work for, what are your usual 

deposits, what kind of usual activity goes on in your account. This 

would tell you, yes, that is the guy, but it will not tell you anything 

about how that account might be used or what is an appropriate 

level of use. So if someone wants to put $10,000 or $20,000 or 

$50,000 on account with a casino, how do we know that that person 

is an appropriate person to be putting it there? And how do we 

know that they are going to gamble it and not move it around to 

some other location? 

I do not think that this solves that problem. You really need an 

anti-money laundering regime in the casino to make it work. 

Senator MCCASKILL. Anybody else? Senator Heller? 

Senator HELLER. Thank you. A few years ago—actually, more 

than a few years ago when I was Secretary of State, I got a phone 

call from a colleague of mine on the East Coast, another secretary 

of state. And the purpose of that phone call was to tell me that his 

son had left for college, and that he got onto a website for gambling 

and had gambled away his tuition. And you can imagine the parent 

was not happy about this, less happy about the fact that when he 

pulled up the website it said ‘‘Las Vegas’’ on it. And it was not a 

Las Vegas website. They just knew if you put ‘‘Las Vegas’’ on the 

site, that that would be more attractive, but it was an offshore site. 

This parent, I sent them to the Gaming Control Board, and how 

that ended up at the end of the day I really do not know. But I 

doubt that it worked out as well as he would have hoped that it 

would have worked out. 

And I am sure that for those sitting on this panel and those who 

were serving in Congress at the time, this was not a rare phone 

call. I am sure that many parents had the same problem, same 

48 

issues, and for that reason, Congress made certain steps, certain 

procedures, to make—to bring this to an end. And I think UIGEA 

is one of those fixes, and it would have made sense, especially in 

this case, where it was prior to this action taking place, that they 

could monitor these transactions through financial institutions, and 

be able to bring it to a halt from unusual transactions that occur 

in these accounts. 

And the reason we are here today is—and I emphasized this in 

my opening remarks, but I continue to want to reemphasize this— 

is that on December 23, 2011, the Administration changed all this, 

changed it all. And the reason that the Administration changed 

this was so that their friends in Illinois and New York could put 

their lottery tickets on line. So unilaterally, the White House made 

a decision 2 days before Christmas when all of us were out of town, 

not calling a single Member of Congress, said we are going to 

change the way we do business here in this country, and we are 

going to exempt Internet gaming, and we are going to say that it 

only pertains to sports betting. And that is why we are here having 

this discussion, this meeting here today. 

As I mentioned, five states now have approved it for their states. 

Twenty states are looking at it now in how to move forward on 

what may be this new source of revenue. And here is my concern. 

I have an iPad here in front of me, and I have a gambling site on 

it. And this is what is going to happen a few years down the road. 

Some parent is going to see their 14-year-old child on an iPad, 

and they are going to be gambling. That child is going to be gambling. And they are going to say, wait a minute, what just happened? They have no idea that this is coming down the road because it is going to be so difficult to determine who that person is, 

what age they are, and where they are. They are not going to be 

able to handle that. 

And because of the actions of this White House is why we are 

where we are today for what I define as friends making—helping 

friends and making sure that some of these states could put their 

lottery tickets online. And it concerns me. 

I want to thank all the witnesses here for taking time, and it was 

very, very helpful. 

I want to start with you, Mr. Canterbury. And taking a look at 

what we are doing and what we are trying to define here, what actions does this Congress need to take? What do we need to reverse? 

Is there something beyond just reversing the actions of the White 

House, or is there more that we can do to assist you and your organization, making sure that we can stop children and perhaps problem gamblers from getting caught up in this web? 

Mr. CANTERBURY. Philosophically, with law enforcement, obviously we are always behind the eight ball on the technology, especially at the state and local level. It will take us years to get to the 

place that we need to be technologically to fight any kind of money 

laundering at a state level that progresses, especially when it is 

cross-border money laundering. State and local law enforcement 

just will not have the resources to do it. 

The interpretation by the Justice Department obviously does not 

concur with what we felt Congress passed prior, so we believe that 

there does need to be a congressional fix. And, you know, the FOP 

49 

has not taken a position pro-gambling or anti-gambling. I mean, 

anything that generates revenue for state and local government, I 

am for it because that is where all of my members get their paychecks. So we are very concerned about the revenue aspect. But we 

also know that the terrorist groups have been using any kind of 

Internet sales, not just gambling, to try to launder money. 

So anything that Congress can do, and obviously we stand ready 

to work with the Senate to develop that technology. But philosophically, the fix would help us immediately. The technology that we 

have seen here today, I am not sure, as Mr. Blum said, that it 

would prevent the money laundering, but it does help with respect 

to underage gambling and troubled gaming, because almost every 

crime that you see associated with gambling is associated with the 

debt. 

Senator HELLER. Mr. Grissen, do you monitor every atate? If 

there are five states out there right now that have approved Internet gambling, there are 20 states that are looking at it. Have any 

of them submitted any legislation that would create the protections 

that you just shared with us? I mean, are they looking at this technology and trying to protect the most vulnerable? 

Mr. GRISSEN. I am not an expert in online gambling or Internet 

gambling. To my knowledge, there are no states that are. 

Senator HELLER. No states have contacted you? 

Mr. GRISSEN. No. I believe that if they had the similar level of 

interest in this committee and technology ion looking at these 

things, that they would. I think there is a reluctance to move first. 

In contrast, banking is using it to create differentiators and provide an enhanced trusted service with our customers. So I think it 

is somewhere in an adoption curve, but I have not seen any overtures to try and look aggressively at this technology. 

Senator HELLER [presiding]. OK. I will save my questions as we 

get through the panel here. But, Senator Blunt? 

Senator BLUNT. Thanks, Senator Heller, and thank you for your 

leadership on this. I would say to Mr. Canterbury that, you know, 

the interpretation that Justice made of the Wire Act certainly was 

not what we anticipated or had been the interpretation when the 

2006 Act was passed. And that decision either totally and forever 

more changes the playing field on these issues, or Congress now 

has to go back as legislation could, and hopefully will do, and look 

at what we need to do now, based with this new interpretation of 

what the Wire Act means. 

Mr. Canterbury, what is your sense of how important it is that 

there be one legal standard here as opposed to state by state or 

community by community standards? 

Mr. CANTERBURY. I think it is important to have one Federal 

standard because you have 50 different State laws associated with 

gaming. For instance, in in my state, they are still arguing on legalizing raffles for churches, you know. There is very little. Our 

state lottery is the only thing that we have besides a little bit of 

charitable bingo. 

And I know that there are absolutely no laws in South Carolina 

that would cover anything involving the Internet or the gaming industry on the Internet. So I believe it needs to be uniform. Law enforcement will not be able to attack money laundering and terrorist 

50 

activity using these funds with 50 laws. There needs to be one, and 

I think it needs to be enacted so that it will work well with the 

state laws. But I think it is going to have to be a Federal standard. 

Senator BLUNT. Yes. Mr. Smith, from your testimony, my impression was that you do not think there could be a worse position than 

we are in right now, that this current regulatory position is the 

worst possible place to be. 

Mr. SMITH. That is correct, Senator. And, you know, it is not the 

first time that Congress has heard about this. You have got the 

National Gambling Impact Study Commission report from 1999 

where you had the state—the National Association of Trained Generals, keying off of what Chuck just said. We were talking about 

having a Federal standard. 

The Attorney General at the time when Florida was mentioned, 

‘‘State law prohibits an individual in Florida from placing a bet or 

wager by wire communication or by use of the Internet. However, 

the burgeoning of the Internet and the difficulty in adopting and 

implementing durable and effective enforcement mechanism makes 

any effort to regulate Internet’s use better suited to Federal legislation rather than a patchwork attempt by individual states.’’ And he 

said that in 1997. 

And so, this new interpretation of the Wire Act that was a 

Christmas present from the Administration just sets us back. 

Senator BLUNT. Right. Mr. Blum, I had a Children’s Hospital 

meeting that I needed to step into, so I did not get to hear your 

testimony. It is available to us, and I have some sense of what was 

in it. But on money laundering, I mean, your sense would be, what, 

that the more outside unregulated contacts there are, the more you 

create vulnerability to both your money that you have and money 

that other people have that they want to send somewhere? 

Mr. BLUM. The problem is you have got to know who owns the 

casino. You have got to know that the money coming into the casino is, in fact, gambling money, and that the profits of the casino 

are a disguised way of hiding proceeds of crime. So that means 

some kind of licensing for the casinos. It means an auditing of the 

casinos to see that what is going on somehow relates to the profit 

they are declaring, and that that money, in fact, is taxed, and the 

people who are in the gaming situation pay taxes. All of this is 

taken care of for the bricks and mortar institutions. 

The only way you can do that on the Internet is to have a uniform Federal standard and to have some Federal agency that takes 

on this tax. The current situation is absolute open season, and I 

do not see how you can get it under control. No individual state 

government, to my knowledge, has the resources, or for that matter, the interest in pursuing individuals who violate state law by 

gambling on the Internet. It seems to me that that is way beyond 

the enforcement capacity of any state government. 

Senator BLUNT. And you believe that the Internet—this gambling on there is being used aggressively as a money laundering 

tool by people who have money that they have through illegal purposes? 

Mr. BLUM. Absolutely. My feeling about it is that this is a tool 

that is being used by people who want to launder money. You 

would not have service providers offering essentially complete softVerDate Nov 24 2008 09:35 Sep 24, 2013 Jkt 075679 PO 00000 Frm 00054 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\82840.TXT JACKIE
51 

ware packages to give you an online casino if somebody did not 

want to use the casino for nefarious purposes; that somebody in 

Bermuda says, hey, you want a casino? We have got three versions 

of it. You can set it up, put whatever name you want on it. And, 

by the way, it is going to be owned by a company that nobody can 

identify. To me, that is guaranteed trouble in the money laundering area. 

Senator BLUNT. And you believe it is one of the top places people 

are laundering money right now? 

Mr. BLUM. Absolutely. Absolutely. It has been for the longest 

time, and that is why it got regulated in the brick and mortar 

world. 

Senator BLUNT. Right. Thank you, Mr. Heller. 

Senator HELLER. Thank you. Senator Ayotte? 

STATEMENT OF HON. KELLY AYOTTE, 

U.S. SENATOR FROM NEW HAMPSHIRE 

Senator AYOTTE. Thank you, Mr. Chairman. I want to thank the 

witnesses for being here. As I listen to this and I think about what 

the Attorney General did nearly 2 years ago where he rolled back 

50 years of established law under the Wire Act basically with the 

stroke of a pen, what we have here is a free for all. I mean, this 

is a situation where we have got not only potential for money laundering, but let us be clear who can use this for money laundering. 

We can have organized crime do it, but we can also have terrorist 

organizations. Would that not be right, Mr. Canterbury? 

Mr. CANTERBURY. I do not think there is any doubt about that, 

Senator. 

Senator AYOTTE. And then, I look at the other issues created by 

this, not only money laundering, but I thought it was very telling 

in your testimony about the use also for drugs to basically—drug 

dealers, some of the issues happening in Costa Rica. I mean, this 

is deeply troubling. All the work that the police are doing every day 

on illegal drug interdiction, and then this is—this becomes a whole 

free for all without some Federal regulation of this. 

And is this—we are already seeing this in terms of drug interdiction and the money laundering on that end? 

Mr. CANTERBURY. That and prostitution. The recent arrests in 

Mexico, for example, it was forcing people to haul in money and/ 

or drugs. And obviously the hauling of the money is just as—or 

more important to them than the hauling of the drugs. So, yes, I 

think it is. 

Senator AYOTTE. Right. So, people are being trafficked over this 

as well. 

Mr. CANTERBURY. Human trafficking is obviously part of this. 

Senator AYOTTE. So, just to be clear, this is having a real human 

impact on people, and we have not even gotten into the addiction 

yet that can be created by gambling, and particularly with no—how 

are we making sure that children are not doing this at this point? 

The story that Dean talked about with someone who gambled away 

their college tuition, this is probably replicated across the Nation. 

Can you comment on that, Mr. Canterbury and Mr. Smith? 

Mr. CANTERBURY. I think the only regulation now is when it says 

‘‘are you over 18?’’ Yes. 

52 

Senator AYOTTE. Well, you know, my kids are pretty sharp. I do 

not think it would take them long to get around that at the age 

of five and eight, right? 

Mr. CANTERBURY. Yes. 

Mr. SMITH. I will go younger than that. My 3-year-old is already 

pretty sharp on devices. 

Senator AYOTTE. And let us not kid ourselves. Our kids are a lot 

more tech savvy than we are, right? 

Mr. SMITH. Well, and you saw with, you know, you have the Lehigh University student who, you know, served 22 months in prison because he got in such debt from online gambling, he tried to 

rob a Wachovia. 

Senator AYOTTE. Have you looked at the issue, Mr. Smith, in 

terms of gambling addiction, whether online gambling actually—I 

could envision a scenario where it would be easier to become addicted to that because you can do it anywhere. And you do not have 

to be seen somewhere to do it. Have you looked at that piece of it? 

Mr. SMITH. Yes, and actually there is a University of Buffalo research study into addiction, and they found that there is a problem 

of gambling among young people. And when there is an increase 

in gambling, there is reason to be concerned. And when you add 

access, it is not without gambling problems. And that goes to the 

pathological addiction issues. 

Senator AYOTTE. So what happens to a state like mine where recently our State legislature made a policy decision that they did 

not want to expand gambling to have, for example, casinos in the 

state. And it was a bipartisan policy decision. I previously served 

as Attorney General of our state, so I dealt with these issues as 

well there. 

How could it be possible in the current scenario that even the 

policy decisions that states like South Carolina make or New 

Hampshire are respected under this scheme, because could not just 

their residents just go online and do anything? It is a free for all 

without even really even any regulation on age that is verifiable. 

Mr. Blum, can you comment on that? 

Mr. BLUM. I think for a state to try to enforce any rules with respect to Internet gambling is really a stretch. First of all, just consider the resources, and the time, and the effort, and the impossibility of building a case that you could actually prosecute. 

States have a lot of law enforcement priorities. To go into this 

is really a big deal. And that is why it has to be regulated, and 

it has to be regulated at the Federal level. 

Senator AYOTTE. Mr. Canterbury, you know, when I was AG, it 

was one of the areas that I know law enforcement did a lot of work 

in, but it was always a technological challenge. For example, Internet predators and fraud committed on the Internet, that was a 

challenge. So I can imagine with the technology challenges that 

law enforcement has on those types of cases that this really is beyond the reach of your average local law enforcement agency to 

be—if there were these types of crimes, money laundering is committed without Federal regulation of this. Would you agree? 

Mr. CANTERBURY. Absolutely. I mean, at the state and local level, 

crime is prioritized, you know. We are going to respond to armed 

robberies and burglaries much faster than we are going to respond 

53 

to the call that there is a prostitute or my child gambled. I mean, 

there will be a response, but the ability of state and local law enforcement to go outside of their own jurisdiction to do anything 

when a child has gambled online in Myrtle Beach, where I am 

from, at a casino in Bermuda, there will be absolutely nothing that 

local law enforcement could do about that. That is why we believe 

it has to be dealt with at the Federal level. 

Senator AYOTTE. Well, I appreciate all of you being here, and I 

want to thank the Chairman and the Ranking Member for having 

this hearing because shame on us if we do not get something done 

on this, because when I think about the possibility for money laundering, terrorism, drug trafficking, and the potential for children to 

get access and to use the Internet, as well as people to not deal 

with the addiction issue, I hope this is something that we move on 

very quickly. Thank you. 

Senator HELLER. Thank you. 

Senator Pryor? 

STATEMENT OF HON. MARK PRYOR, 

U.S. SENATOR FROM ARKANSAS 

Senator PRYOR. Thank you, Mr. Chairman. I am just going to 

have a couple of questions. I think I will focus those on Mr. Smith, 

and then I’m going to get out of the way and let my other colleagues ask questions. 

Mr. Smith, you rightly point out that the Congress has the duty 

to protect our children, and I think we do as well. And I am a big 

supporter of the unlawful Internet Gambling Enforcement Act. And 

I would like to get your thoughts on anything that can be done, 

say, in the area of advertising that, you know, advertising geared 

toward children that you would like to see us address and how you 

think we can do that. And I would just like to get your thoughts 

on that. 

Mr. SMITH. OK. Are you speaking specifically for the gaming? 

Senator PRYOR. Yes. 

Mr. SMITH. That is a big challenge. Anybody that has played a 

game whether on an app, or on a desktop or laptop, or other handheld device, you are constantly seeing the pop up ads target the 

various phones. And to my knowledge, there is no screening mechanism. If you are a parent and you have purchased your 15-year-old 

a cell phone to use for, you know, to pick him up from football practice or something, you are not going to be able to control, to my 

knowledge right now, those ads coming up encouraging them to 

play a casino game, and target them, and start getting them playing those games online through their phones. 

And the gaming industry is increasingly moving to the mobile devices, and there is no protections in place. 

Senator PRYOR. I think that we all, and I heard Senator Ayotte 

a moment ago talk about children and, you know, just the concerns 

we have for children. I think age verification obviously is going to 

be a big challenge. It has been in other contexts on the Internet. 

And the easy availability of the access of Internet gaming is certainly a big concern that, you know, we have struggled with in the 

Subcommittee before in various contexts. 

54 

And, you know, there are technology issues about should there 

be some sort of blocking mechanism for parents on various devices, 

whether it is desktop, laptop, tablet, cell phone, you know, whatever it may be. And, you know, we talk about those sometimes in 

this subcommittee or there is another subcommittee in Commerce 

that we sometimes talk about those things. But I think that just 

in general, we definitely have that concern, and I think I would 

like to just hear more from you and, you know, work with you on 

this as we go forward. 

And I want to thank—I am going to call you Chairman Heller 

today. You will be a chairman one of these days, and I just want 

to say I want to thank you for your leadership on this. I know this 

is something that is very important to you and Senator McCaskill 

as well. So thank you all for having this hearing, and, you know, 

I look forward to working with you on this issue as we go forward. 

Thank you. 

Senator HELLER. Senator, thank you. 

Senator Blumenthal? 

STATEMENT OF HON. RICHARD BLUMENTHAL, 

U.S. SENATOR FROM CONNECTICUT 

Senator BLUMENTHAL. Thank you, Chairman Heller. And I want 

to join—I want to thank and join in thanking you and Senator 

Pryor for having this hearing. I think there is a clear moral and 

economic imperative in acting to prevent the abuses and wrongdoing that clearly are in inherent, almost inescapable, in this form 

of gambling if we fail to take effective countermeasures. 

And I am not sure in many areas whether they can be taken, not 

only because of the impact on children, but the potential dangers 

of fraud concerning adults, verifying means of payment, and making sure that payment is made. The resources that would be required for effective enforcement of preventive and protective measures are, in my view, staggering. 

But I want to focus on one danger that perhaps has not been explored. Online gambling involves potentially huge amounts of information and data from participants, does it not? 

Mr. BLUM. Senator, if I may, that is a huge problem. If I were 

a Russian crook, I think I would open up a casino online and steal 

credit card information. 

Senator BLUMENTHAL. Exactly. 

Mr. BLUM. Go out of business a week later. Who is to catch me? 

Senator BLUMENTHAL. And you would use that credit card information—— 

Mr. BLUM. Instantly. 

Senator BLUMENTHAL.—however you might like. 

Mr. BLUM. Exactly, very quickly. 

Senator BLUMENTHAL. All kinds of collateral damage. 

Mr. BLUM. Of course. 

Senator BLUMENTHAL. And even with the best of intentions, even 

an honest online gambling operator, absorbing and accumulating 

huge amounts of information could potentially be the victim—‘‘victim’’ in very heavy quotes—of a theft of that data. Could it not happen that way? 

Mr. BLUM. Absolutely. 

55 

Senator BLUMENTHAL. And do you know whether online gaming 

operators are taking any kind of measures against that kind of 

theft of their data or breach of their data? In other words, improper 

disclosure? 

Mr. BLUM. I am sure there is a range among the people who are 

online operators. I am certain that the public companies or perhaps 

companies who have brick and mortar casinos and are regulated 

heavily in the states are far better at securing data than some of 

the other operators. 

But again, there is no uniformity of regulation, and no ability to 

really control people from outside the jurisdiction offering products 

which may be utterly insecure to people inside a given jurisdiction. 

Senator BLUMENTHAL. Even the most established and trusted of 

institutions, whether our banks or state governments, have been 

subject to theft or breach of data. 

Mr. BLUM. Absolutely. 

Senator BLUMENTHAL. So the chances are highly likely that the 

more online gambling there is, the more such breaches and theft 

there is likely to be. 

Mr. BLUM. The way you have to think about online casinos is 

that they are, for all practical purposes, banks. They are going to 

have accounts. Somebody opens an account. There is a way of putting money into the account. All of that information is going to be 

in the hands of the casino operator, and the money can be moved, 

moved from one account to another, moved back to the individual. 

It has to be able to be moved back to the individual. So, you really 

are looking at creating something in a regulatory scheme that resembles what we already do for banks. 

When the law was on the books, the Uniform Act, that controlled 

to some degree Internet gambling, it really used the banking system as a way of leveraging and controlling what these people did. 

So if I was an offshore guy, I could not use the banking system or 

credit cards to get money into my offshore accounts. When the law 

was undercut by that decision, the doors were opened, and now the 

banks simply process the money and let it all happen. 

I think you have to go back to using the banks as a lever and 

element of control. And you also have to regulate and control these 

offshore enterprises, or even the—in the various states, the Internet casinos. 

Senator BLUMENTHAL. My time has expired, but I would be interested in another area, which is one that was mentioned earlier concerning human trafficking. I do not know whether you have instances of online gambling associated or involved with human trafficking or similar kinds of issues. If you could provide that information, I would appreciate it. 

Mr. BLUM. Well, the biggest industry on the web is pornography, 

and the pornography is part and parcel of all of this problem of 

trafficking. And there is an awful lot of money that goes flowing 

through the system with respect to that—with respect to pornographic websites. 

I think that is an area that is worth exploring. I do not think 

any of these people are what we call the finest upstanding citizens 

of our respective states. 

56 

Senator BLUMENTHAL. And so, the two worlds merge, pornography and human trafficking. 

Mr. BLUM. The same service provider I talked about in Bermuda 

that was offering casinos was offering online porn sites with all of 

the material. So, you know, it is take your pick. We will get money 

out of the country one way or another, and the way you do it is 

you just simply send the money offshore by sending it to this 

website, and suddenly it looks quasi-legitimate. 

Senator BLUMENTHAL. Thank you. Thank you all for your excellent testimony today. Thank you. 

Senator HELLER. Senator, thank you. I am going to do another 

quick round of questions. The Chairwoman is unable to return, so 

I will just have a few more questions here, and the hearing will be 

over. 

But I want to start with you, Mr. Blum. You did a pretty good 

job in your earlier testimony describing probably the history of 

gaming in Nevada. Prior to 1967 when Senator Laxalt was elected 

Governor, it was the Wild West. And it was the creation of the 

Gaming Control Board and the creation of actually allowing brick 

and mortar companies to incorporate that put them under the aegis 

of the SEC, FBI, that they could be monitored, which was necessary. And my concern is we are back to the Wild West now. 

Mr. BLUM. You are absolutely right, Senator. And that regulation, the experience of Nevada, New Jersey, are pivotal in having 

people understand why this has to be regulated. You guys did it, 

and you know why you did it. 

Senator HELLER. And by the way, New Jersey did a great job, 

too. 

Mr. BLUM. Yes. 

Senator HELLER. I mean, they saw the concern, the problems, 

and their boards were set up also. 

Mr. BLUM. And we have all been watching Boardwalk Empire, 

and we know the history of the people who originally wanted to 

control it in New Jersey. 

Senator HELLER. Yes. I argued early on—in fact, we had a hearing about this on the Financial Services Committee when I was in 

the House, and Ways and Means Committee. And I always argued 

at that time that maybe a state like New Jersey or a state like Nevada ought to be doing the policing of this Internet effort. I do not 

think today that flies, but I thought that would have been two 

states anyway that were prepared. Other states are making headway, good headway—Mississippi, Missouri, and some others—in 

their control of their brick and mortar companies. 

But I am just concerned that we have found ourselves now back 

to where we were prior to 1967 in that we have a free for all now 

of what is going on with the Internet. And the question is, and this 

is why you are here, as we prepare legislation, we want your input 

so that we can make sure that we take care of those that are most 

vulnerable. 

Mr. BLUM. I think it has to happen on the Federal level. It has 

to be sophisticated. It cannot be existing agencies. So, for example, 

people have suggested let IRS do it. IRS is deep in its own trouble, 

not enough people, supposed to be implementing the health care 

law. It just does not have the resources and the capacity. 

57 

And the model I would see is some kind of Federal entity that 

does it, the finance by the people who seek licenses, and with expertise specific to this industry. 

Senator HELLER. Yes. Well, I certainly do appreciate your testimony and the help it will be to formulate this piece of legislation. 

I want to go to you, Mr. Grissen, and your presentation. Technology is ever changing. How do you keep in front of that? How do 

you keep a data breach—I mean, what keeps a person from having 

a picture of someone else in front of them and taking a picture of 

that off their iPad, sending it in? How do you stay in front of this, 

and how will it stop these data breaches? 

Mr. GRISSEN. Sure. Great questions. You asked earlier, how do 

I know who it is, what their age is, and ensure that it is not a 

minor impersonating the father because they found their password. 

I would invite any of the Committee members of their staff to actually try and impersonate me. I will give you my PIN, so you can 

act as if you were a minor or a fraudster. The software would deny 

access. 

So, the technology is very sophisticated. Obviously the cyber 

criminals continue to advance their efforts, our cyber legislation 

and efforts by Congress are important to bring forward the standards. It is important to be flexible in legislation to take advantage 

of new technologies and new innovations. 

As to data breaches and security, it is important to design systems in a way that if your phone is lost, stolen, or compromised, 

that there is no identity information on it. That is the way proper 

technology is built. Encrypted using DOD type standards, so any 

personal information would not be available. 

NIST has done some really fascinating things as part of the Nation’s strategy for trusted identifies in cyberspace to separate the 

identity information from the records. There is an anonymity that 

can be pulled together to establish online trust. 

Senator HELLER. I believe there is a way to do this, and I think 

the technology is there. We can verify that individual. I just worry 

about the movement of technology, the advancements of technology, and their ability to overcome any system that may be there. 

Mr. Smith, I want to finish with you because I think you are the 

crux of the argument that we are having here, trying to help those 

children and those that are most vulnerable. And the concern is 

now you have states that are offering a lottery, instant cash 

prizes—instant cash prizes—on the Internet for lotteries, and the 

impact that clearly you see and most of us in the room see, the impact of that individual participating in that lottery, and the impact 

that that may or may not have, especially if you are a problem 

gambler, especially if you are too young. 

And I want to thank you for your testimony. If you have anything to add to what you have said up to this point. I just believe 

preventing these kind of problems is critical, and I think it is a priority of this Congress. 

Mr. SMITH. Yes, I agree with you, and you said it well. 

Senator HELLER. OK. I think that is the end. My time has run 

out for the second round. But I want to thank everybody here, and 

I wanted to thank everybody also here in this audience that has 

taken time. This is an important subject, and my—like the ChairVerDate Nov 24 2008 09:35 Sep 24, 2013 Jkt 075679 PO 00000 Frm 00061 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\82840.TXT JACKIE
58 

woman, my phone has rung off the hook about this particular 

issue, on both sides. As you can imagine, on both sides. 

But it is going to take witnesses like yourselves that is going to 

help us formulate this. And if my staff can stay in contact and continue to receive your expertise and opinion on these particular 

issues, I would certainly appreciate it. But again, I want to thank 

you for being here and taking time from your busy schedule to help 

update us and for giving your testimony to this Congress. Thank 

you very much. 

And with that, we will end this hearing. 

[Whereupon, at 11:42 a.m., the hearing was adjourned.] 

(59) 

A P P E N D I X 

NATIONAL COUNCIL ON PROBLEM GAMBLING

Washington, DC, July 12, 2013 

Hon. CLAIRE MCCASKILL, Chair, 

Hon. DEAN HELLER, Ranking Member, 

Senate Committee on Commerce, Science, and Transportation, 

Subcommittee on Consumer Protection, Product Safety, and Insurance, 

Dear Senators McCaskill & Heller: 

Thank you for scheduling the hearing on the Expansion of Internet Gambling and 

Consumer Protection. In addition to our longstanding concerns about Internet gambling and addiction I urge that you consider the burgeoning issue of social casino 

gaming in your review. Social casino games are gambling games played on Facebook 

and other social networks, including web and mobile games, that do not require 

users to pay to play and/or don’t provide prizes of value. These games are aggressively monetized and marketed yet completely unregulated. Common social gaming 

features, such as high frequency, duration & speed of play, frequent but variable 

rewards and big early wins are all strongly associated with gambling addiction. In 

short, some features that make social casino games so attractive are also potentially 

addictive. 

These games are the fastest growing segment of the gambling industry, with an estimated 170 million monthly average users and revenues of approximately $2 billion last year alone. Many of the most popular (and profitable) social casino games 

are operated by gambling companies. While we believe that the most social gaming 

is innocuous, our concerns center on three main areas: 

Underage Play—While Facebook has an age limit of 13, it is extremely difficult 

to enforce. The majority of social casino games, sites and apps we have examined 

have no age limits at all. In some cases the limits are in the terms and conditions 

but have no enforcement mechanism. In addition, play on these gambling-like sites 

may condition or habituate youth to gambling, making them more likely to engage 

in ‘‘real money’’ gambling and/or develop gambling problems. We know from decades 

of research that the earlier kids start to gamble the more likely they are to have 

problems. Pathological gamblers in treatment report on average they began gambling seriously for money at age 12. Also, many social gaming sites use animation 

and/or cartoon images that may appeal to younger users. The Chair of the U.K 

Gambling Commission reported earlier this year that nearly 600,000 young people 

claimed that they had either gambled or played free games online in Britain in the 

past week. 

Fairness—While social casino gambling sites use names, images and themes related to gambling, there are important but often hidden differences. One is that 

most sites use ‘‘adaptive’’ or ‘‘reflexive’’ algorithms and game mechanics designed to 

increase the time spent playing the game by modifying the results so that the longer 

you play the more likely you are to win. This obviously encourages play, but it may 

be problematic when users are also encouraged to pay for their chips or coins in 

order to progress within the game. It also may create erroneous expectations for 

winning that, when the user switches to ‘‘real money’’ gambling—often hosted or operated by the same company—that are extremely dangerous as the longer you play 

the more likely you are to lose since the odds are now against the user. There is 

little consumer protection or disclosure in general in this space. Social casino games 

are not regulated by either state gaming commissions or by hosts like Facebook or 

Internet service providers. While NCPG has proposed a voluntary code of conduct, 

no advertising or responsible gaming standards have been adopted by the industry. 

Gambling Addiction—The criteria for gambling addiction includes gambling with 

increasing amounts of money to achieve more excitement, attempts to cut back time 

and money spent, preoccupation, playing when feeling distressed (e.g., helpless, 

guilty, anxious, depressed) to relieve or escape these feelings. Most importantly, 

problem gamblers report that the action is the high they seek, it is the betting and 

60 

amount of risk that is exciting and addicting, not how much they win or lose. Indeed, every study of Internet gambling addiction has found a higher rate of problem 

gamblers among those who gamble online. Even if social casino gamblers rate isn’t 

elevated, the general public prevalence rate of 1 percent means that approximately 

1.7 million monthly social casino users are likely to suffer from gambling addiction. 

At-risk gamblers and current problem gamblers may be attracted by or to social casino gaming. 

We have broader concerns about online gambling and consumer protection. For 

example, studies have found that some Internet casino sites provide inflated payout 

rates when gamblers play on the slot machine demo games. One published study 

found 40 percent of sites surveyed provided inflated payout rates (over 100 percent) 

in the demo session. But these unrealistic high rates were not maintained when 

playing for real money. In addition, some sites used marketing strategies reinforcing 

false beliefs about the notion of chance and randomness. None of the state Internet 

gambling regulations introduced to date fully incorporate our Internet Responsible 

Gambling Standards, a compilation of best practices from regulators around the 

world to help protect Internet gamblers. Nor has there been sufficient state funding 

for problem gambling programs—states and non-profits spend approximately $60 

million per year to fight gambling addiction, approximately 1 percent of the $6 billion in annual social cost, and less than one-tenth of one percent of the 2012 legal 

gambling revenue of $95 billion. As a result, most states do not have adequate public health or consumer protection programs in place to address current gambling 

problems, let alone expanded Internet gambling. 

I attach a copy of my testimony at the most recent House hearing on Internet 

gambling that highlights these larger issues, including the lack of any Federal funds 

or staff for national programs or assistance to state health agencies to prevent and 

treat gambling addiction. Now that 48 states have some form of legalized gambling, 

and 75 percent of adults (and children aged 13–17) report having gambled in the 

past year, it is very timely to look at the broad public health and consumer protection aspects of this activity, especially as technology encourages and regulation allows gambling to flourish online and increasingly via social networks. 

The National Council on Problem Gambling is the national advocate for programs 

and services to assist problem gamblers and their families. NCPG does not take a 

position for or against legalized gambling. We were founded in 1972 and our 41-year 

history of independence and neutrality makes the National Council the most credible voice on gambling issues. The National Council has 37 state Affiliate chapters, 

including in Missouri and Nevada. NCPG is a 501(c)(3) not-for-profit charitable corporation and does not accept any restrictions on contributions. 

The expansion of Internet gambling, including social casinos gambling, includes 

new risks for consumers, new responsibilities for state governments, regulators and 

operators, and possibly new opportunities for consumer protections. Please feel free 

to contact us with any questions. 

Sincerely, 

KEITH WHYTE, 

Executive Director. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. AMY KLOBUCHAR TO

CHUCK CANTERBURY

Question. Enforcement of our laws, whether state or federal, is important to the 

protection of consumers and our national security. Your members enforce laws 

aimed at keeping consumers safe in interstate markets like gambling. Can you expand on how you work with law enforcement entities at various levels of government and across jurisdictions? Are there ways these relationships can be improved? 

Answer. I appreciate the opportunity to respond because this is an important 

question and it demonstrates the thrust of my testimony before the Subcommittee, 

which is that Congress must act to build a Federal regulatory framework to facilitate protections for our citizens and a means by which law enforcement can cooperate to shut down bad actors. Without such a framework, law enforcement agencies 

are unable to coordinate effectively. 

The first challenge law enforcement would have is to identify if there was a crime 

committed and, if so, in what jurisdiction the crime occurred. For example, if an 

Internet user places a bet or buys a product from his home in one state and money 

from his account is sent from an Internet server physically located in another state 

to an off-shore operator who accepts the money and then disappears without placing 

or paying the wager or sending the product to the buyer, in which jurisdiction has 

the crime been committed? The state where the user placed an illegal sports bet? 

61 

The jurisdiction from which the money transfer was authorized? Or did the crime 

occur offshore when the operator denied or withheld the payment or product? Right 

now, without any coherent Federal strategy in place, these questions have to be answered by local and state law enforcement agencies. It becomes a very real question 

of resource allocation: can the agency spare the manpower to sort this out and coordinate with other jurisdictions, perhaps including those overseas? I suspect in 

many cases, the answer to this will be no. State and local agencies must prioritize 

their resources to respond to crime which occur in their jurisdiction. Unless we are 

looking at a large scale money laundering operation and we have the full cooperation of Federal law enforcement agencies, I think it is doubtful in most cases that 

a smaller agency will be able to investigate a complaint like the one I have described. 

In cases where there is suspicion of large scale criminal activity, the Federal Government must be involved. Consider, for example, how the Federal Government was 

able to bring charges against 11 defendants under both the Unlawful Internet Gambling Enforcement Act (UIGEA) and the Illegal Gambling Business Act (IGBA). The 

latter statute was adopted by Congress in 1970 in an effort to attack the profits of 

organized crime. Apart from the individual making the wager, the statute allows 

any person that plays a role in the business or organization of conducting a gambling business to be charged with violating or conspiring to violate the Act. A key 

component to this law, however, is that there must be a State statute prohibiting 

the activity, which then would allow the Federal Government to investigate and 

prosecute the case. The indictments were brought using the State of New York, 

which defines gambling as taking place based on the location of the bettor. In other 

states, bettors may be able to call-in their wagers to an offshore bookmaker and not 

be in violation of state law, thus precluding the Federal Government from using the 

IGBA to go after these criminal enterprises. Obviously, this is not a very effective 

national strategy. 

Compounding this difficulty, several states have approved and many more states 

are actively considering proposals that would legalize various forms of Internet gambling, such as poker, lotteries, and casino games, all of which are no longer deemed 

unlawful by the Wire Act. Such state-authorized and promoted wagering, in conjunction with rampant gambling on offshore sites out of the reach of Federal and 

state prosecutors, will undoubtedly result in a dramatic increase in Internet gambling in the United States. Patchwork state and tribal regulations could also spark 

a regulatory race to the bottom without Federal standards and coordination with 

Federal law enforcement. 

I hope this answers our question fully and I want to assure you that the more 

than 330,000 members of the Fraternal Order of Police are eager to work with you 

and other Members of Congress to address this issue. If I can be of any further assistance or provide you with additional information, please do not hesitate to contact 

me or Executive Director Jim Pasco in my Washington office. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. AMY KLOBUCHAR TO

JACK A. BLUM, ESQ. 

Question. The idea of expanding states’ authority on Internet gambling raises concerns among some of the brick and mortar gaming operations. Can you discuss how 

you expect states to work with existing operations and how we can make sure that 

any discrimination or inconsistencies in rules or regulations are addressed? 

Answer. I do not believe that Internet gambling can be successfully regulated by 

the states. The states do not have the resources to develop agencies with the capacity to deal with the problem. Regulation has to come at the Federal level. If the 

brink and mortar facilities are regulated at the state level I assume the Federal regulator would coordinate with the state agencies. That would eliminate discrimination and inconsistencies. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. KELLY AYOTTE TO

CHUCK CANTERBURY

Question. As you know, nearly 2 years ago the Department of Justice rolled back 

50 years of established law by stating the Wire Act only applies to online sports betting. By limiting the scope of gaming operations enforceable under the Act, how has 

this affected your ability to crack down on illegal operations? When states are allowed to sanction various online gaming ventures within their borders, what additional challenges are faced by law enforcement? Does this make it easier or harder 

to protect consumers? 

62 

If online gambling continues to expand freely into the states with no or limited 

Federal regulators, do you have any confidence in state agencies cracking down on 

malicious actors? Is it realistic to expect a state to slap the hand of one of its agencies which is raising millions of dollars in revenue each year? Would you expect it 

to be common play for regulators to look the other way on age verification and authentication? What is their incentive to strictly enforce the laws? 

As we address this issue, we must make sure there are meaningful regulations 

where states can opt out. We must make sure that we address child protections, addictions, anti-terrorist funding, money laundering and drug trafficking. I am concerned after Attorney General Holder upended the Wire Act and UGIEA, it made 

it easier for revenue-starved states to take advantage of citizens in other states. 

How do we make sure the integrity of the borders of New Hampshire are protected? 

Does a state-by-state approach make the most amount of sense? How do we maintain any control over payment systems? 

Answer. I appreciate the opportunity to respond because these are important 

questions which go to the heart of my testimony before the Subcommittee: It is Congress, not the states acting independently, that must act to build a Federal regulatory framework to facilitate protections for minors and other at-risk citizens, as 

well as a means by which law enforcement can shut down bad actors. States working without a national framework will be totally ineffective. 

Let me begin by stating that the Memorandum of Opinion issued by the Assistant 

U.S. Attorney General in the Office of Legal Policy in December 2011 was not the 

start of law enforcement problems related to Internet gambling. The Federal law 

has never caught up with the technology, so the existing ambiguities in the application of Federal laws, most prominently the Wire Act, to Internet gambling impeded 

law enforcement’s ability to combat illegal activity at the Federal level. Existing 

gambling enforcement tools did lead to Federal indictments of several major Internet gambling operators in the spring and the fall of 2011, but almost all of the 

charges were based on money laundering and bank fraud laws. None of these operators have been charged with offenses that directly dealt with Internet gambling activity that is offered by a myriad of offshore Internet sites to U.S. citizens. In fact, 

as I made clear in my testimony, the Federal charges brought against these defendants under the Illegal Gambling Business Act were dependent on state law. 

Every expert agrees that millions of Americans continue to gamble on the Internet even though such gambling is illegal, unregulated, and offers no consumer protections. Internet gambling is run by offshore operators, some of which operate from 

regulated foreign jurisdictions, but many of which operate from small Caribbean 

countries that do little to regulate the gambling and do nothing to protect consumers and minors. These operators also often offer online sports betting, as well 

as casino-banked games, such as slots and roulette. 

Prior to the opinion released by the U.S. Department of Justice, many states were 

considering legalizing and promoting intrastate Internet gambling to generate revenue. In the wake of the opinion, several states have approved and many more 

states are actively considering proposals that would legalize various forms of Internet gambling, such as poker, lotteries, and casino games. Such state-authorized and 

state-promoted wagering, in conjunction with rampant gambling on offshore sites 

that are beyond the reach of Federal and State prosecutors, will undoubtedly result 

in a dramatic increase in Internet gambling in the United States. The FOP is concerned that, absent Federal standards, a patchwork of laws could result in a regulatory race to the bottom as states and sovereign tribes compete for gambling revenues. 

The law enforcement and consumer safety risks associated with Internet gambling, particularly unregulated foreign Internet gambling, are well-known and were 

well covered at the recent hearing. It is the position of the FOP that Congress must 

update the Wire Act of 1961, the Illegal Gambling Business Act of 1970, and the 

Unlawful Internet Gambling Enforcement Act of 2006 to ensure that they clearly 

apply to modern technologies and to all forms of prohibited Internet gambling. Legislation should strengthen enforcement by providing tools, such as a ‘‘good actors’’ 

list, to crack down on unlicensed operators, thereby empowering law enforcement 

to work with financial institutions in shutting down and illegal activity, as well as 

stiffen penalties against illegal operators. 

On the issue of permitted Internet gambling, as I stated in my testimony, the 

FOP is not advocating for any expansion in defining what online gaming activity 

is deemed unlawful. This was the position we took when we supported UIGEA and 

it is the position we still hold. 

63 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. KELLY AYOTTE TO

MATT SMITH

Question 1. In your testimony, you indicate that state lotteries were given a gift 

when the Department of Justice reversed its long-standing view that all Internet 

gambling was unlawful. In the Internet age, every smartphone could become a slot 

machine. Please expound on your testimony to explain your concerns about the explosion of Internet gambling which many contend is right around the corner. 

Answer. Senator Ayotte expressed concern about her children’s ability to play 

games on mobile devices, a concern we share. It is our children that will be highly 

targeted by online Internet gambling proprietors. As I stated in my testimony, 

‘‘Ninety-three percent (93%) of teens age 12–17 utilize the Internet and 97 percent 

of teens of the same age participate in some form of online gaming making them 

attractive targets for gambling marketing as well as illegal and fraudulent operators.’’ This makes Internet gambling not something containable to adults or inside 

state boundaries when anyone with a mobile device can travel with their own pocket 

casino. Everyday younger and younger children are being given devices on their parents’ accounts. Cleaver marketers are going to find ways around safeguards and 

technology to reach the purchasing prowess of America’s youth. And, as was discussed during the hearing, there is a very frightening possibility of human trafficking by international criminal enterprises who will once again engage in online 

gambling sites. We believe the state lotteries that pushed for the Department of 

Justice’s memo out of a desire for sources of revenue are ignoring who will actually 

be marketed to and become the victims of the forthcoming expansion of on-line gambling. 

Question 2. I recently read a statistic that approximately 2 million Americans suffer from gambling problems and addictions and about 1 percent of the worldwide 

population (according to the National Council on Problem Gambling). With the prevalence of unregulated offshore sites, it would seem that the United States finds 

itself in the unfortunate position of incurring all the social costs of online gambling 

while having no control over the sites that serve U.S. citizens. In your capacity as 

President of the Catholic Advocate, can you talk about your experience working with 

those who suffer from addictions? 

Answer. While directly working with those who suffer from addictions is outside 

our mission, we are concerned about the cost and impact on the family that comes 

with addiction as it relates to public policy. We believe experts in addiction science 

should be consulted about the consequences are part of this discussion. Gambling 

addiction affects personal relationships. Divorce, child abuse and suicide are all too 

common in homes where pathological gambling is present. One example in the 

United States, a report by the National Council on Problem Gambling mentioned 

in the question found approximately 20 percent of pathological gamblers attempt 

suicide. The Council also said suicide rates among pathological gamblers are higher 

than any other addictive disorder. We are concerned, at the state level, there has 

been a short-sided examination about the true costs associated with expanding gambling into every home in America. The debates at the state level surround increased 

revenue from Internet gambling, but very few are expressing concern about the 

aftermath. As a result, when the true costs begin to reveal themselves down the 

road, every level of government will be burdened with increased spending on addition and other related social services programs. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. KELLY AYOTTE TO

JACK A. BLUM, ESQ. 

Question 1. The U.S. Treasury Department has several comprehensive international anti-money laundering programs that work 24/7, 365 days a year in an attempt to safeguard our international and domestic finance systems. Criminals from 

the beginning have laundered the proceeds of their illegal activity through a number 

of legitimate and illegitimate means. From my experience as Attorney General, I 

would argue that this is an area where state and local law enforcement need the 

Federal Government’s assistance. First, do you agree with this, and second, are you 

concerned that unregulated offshore gambling sites may be used for money laundering purposes? In your estimation, what can Congress do to enhance our antimoney laundering capabilities? 

Answer. Money laundering controls have to operate at the Federal level to be effective. State law enforcement authorities have other priorities and concerns and 

lack the necessary resources. With exception of New York, most lack the jurisdiction 

and expertise to conduct a major money laundering investigation. New York is the 

64 

exception because as a banking center most fund movements touch the New York 

banks and the New York Fed. Further, some states lack robust laws aimed at 

money laundering. 

I am quite concerned about unregulated offshore gaming sites being used as a vehicle for money laundering. A casino—offshore or onshore—is very much like a 

bank. Customers have accounts. They deposit money to gamble, winnings and losses 

are either added to or taken from the account and the gambler can ask for the funds 

in the account to be returned. Of necessity the casino accounts will be encrypted. 

A casino controlled by gangsters could easily be used to move money either into or 

out of the country disguised a gambling fund or gambling winning. The corrupt casino operator could easily transfer funds from one account to another thus disguising the connection between the origin and the destination of the funds. 

All online casinos should be federally licensed and federally regulated. There 

should be severe penalties for U.S. persons gambling through unlicensed casinos. 

Banks and credit card companies should require a showing that the casino has a 

license before they can transmit funds to or from a casino. Finally all casinos are 

subject to the Bank Secrecy Act and the provisions of the Patriot act. They are obligated to identify their customers and screen transactions for suspicious activity. 

This obligation must be enforced either by gaming regulators or by the existing regulatory agencies. 

The two most important steps would be to increase funding for regulators and 

prosecutors and the push prosecutors to send revoke banking licenses when banks 

are caught in the act. At the moment the Justice Department uses ‘‘deferred prosecution agreements’’ to avoid threatening a bank’s license. 

Question 2. Mr. Blum, when there are 50 jurisdictions instead of 1 jurisdiction, 

how has this opened up the flood gates for corruption, money laundering and additional crime? 

Answer. Any crook seeking to avoid state prosecution will use multiple jurisdictions to run their operations. The casino’s incorporation will be in one state, the 

server running the software in another, the operator and manager in a third and 

the banking relationships in a fourth or a fifth. Because there is little corporate 

transparency and because the practical problems of enforcing laws across state lines 

are immense, organized crime will have a field day. 

Question 3. What means do states have to monitor large scale laundering of capital by other countries, terrorist networks, or international crime syndicates? 

Answer. With the exception of New York, states are powerless to operate in the 

international arena. They lack the budget, the expertise, the ability to gather evidence and many cannot make use of the international mutual legal assistance 

agreements. For example, the Cayman Islands argue that its agreement with the 

U.S. is limited to the Federal Government. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. KELLY AYOTTE TO

THOMAS A. GRISSEN

Question. As a former prosecutor and Attorney General, I have built a career enforcing our laws and going after those attempting to circumvent our rules. In your 

testimony, you argue that the tools we have in place are inadequate. I wholeheartedly agree. When Attorney General Holder opened the flood gates to online 

gambling, he made it infinitely more difficult to target corruption, money laundering 

and fraud. While I applaud your commitment to creating software that improves 

identity assurance and verification, what assurances can you give this committee 

that online verification is foolproof? Convenient stores claim they spend millions of 

dollars training their clerks to identify fraudulent actors. How would you compare 

the ability of your software to identify a fraudulent actor verse a person in a store? 

Is it easier to get around this verification online? What more needs to be done to 

verify age and geolocation online? 

The Federal Government faces serious enforcement challenges in this area. What 

assurances does a state which opposes Internet gambling have that sites licensed 

in other states will be 100 percent effective in preventing play by residents of states 

where online gambling is illegal? 

Answer. Thank you for [your] thoughtful questions about the ability of state-ofthe-art Ecommerce trust verification systems and technology to assure and verify 

identity. I am confident that the fuller description of these systems and technology 

provided below will leave [you] no doubt about the relative efficacy of Ecommerce 

solutions to customer identification versus those deployed in the convenience store 

industry. 

65 

I describe below a generic online gambling customer identification solution based 

on current technologies employed in other sensitive Ecommerce sectors. The technology most certainly exists for such a system in the online gambling space, but as 

I indicated at the Hearing, I am unaware of any state using or requiring the technologies I describe that might be the underpinnings of any Federal standards regarding the responsible provision of Internet gambling. 

Identity Verification and Internet Gambling 

Critical to an effective regulatory process that assures and verifies customer identity, are strict regulatory requirements mandating a series of rigorous player identification processes prior to establishing a new account to play and verifying identity 

at time of play (log-in). These regulatory requirements and processes would, beyond 

a doubt, offer much better safeguards against a number of customer identification 

risks (e.g., underage gambling) than exist in the brick and mortar industry, given 

the fact that the identities of adults can be validated through real-time automated 

crosschecks of existing databases and biometrics that are not utilized in brick and 

mortar gambling establishments. 

An acceptable solution would be a step-wise Know Your Customer protocol like 

the one described below that builds a profile of the prospective online gambling customer. That is, age verification, identity verification, geo-location and cross checking 

against databases of unwanted persons are components in an integrated process. 

Operators and regulators alike would then have a level of comfort that each prospective customer is who s/he say s/he is, is of legal age, is located in a jurisdiction 

where the activity is legal and is not otherwise barred from participation. Moreover, 

the system would provide the operator and regulator a full and complete audit trail 

addressing these issues as well as other issues focused on consumer protection, 

fraud prevention and compliance with anti-money laundering and other laws. 

Player Registration—The first step involves identifying a prospective customer’s 

IP address and verifying that the customer is physically located in a jurisdiction 

that permits online gambling. Assuming that the customer’s geo-location is verified 

and appropriate, an automated callback would be made to the landline telephone 

linked to the address provided by the customer during the registration process, 

using a reverse lookup of phone records. The customer is asked during the callback 

to input, on the telephone type pad, a verification number that is visible on the customer’s computer screen. Successful completion of this process mitigates that the 

customer is residing at the address provided and that the person is indeed seeking 

to open the account. 

If the process is successful, personal identification information provided by the 

customer is then cross-matched against various government-maintained databases 

of undesirable individuals. Individuals on such lists would not be permitted to open 

an account. 

A further step would leverage the ability to triangulate the location of a user’s 

IP address with the location of a user’s mobile device through a SMS (short messaging service—commonly known as a ‘‘text message’’) coupled with ‘‘global positioning technology’’ (GPS). Using one of many technology providers, a SMS text is 

sent to the user. The user would then be required to click a confirmation link with 

their mobile device. In addition to triangulating the player’s exact location to within 

five to ten meters, this step validates that the mobile number entered is indeed the 

number of the player. If the check is inconsistent with either the IP address information or other location data obtained from the player or if the player is located 

in a jurisdiction that does not authorize online gambling, registration will be suspended. 

In a well-regulated online gambling regime, all operators would be required to 

verify the identities, locations, and ages of their customers. Among other things, 

prospective customers would be required to provide data such as their name, address, date of birth, driver’s license number, social security number and credit/debit 

card information. 

Of course, if a prospective customer volunteers a date of birth indicating that the 

customer is underage, that customer would be barred from opening an account. 

If the date of birth provided does indicate a customer is ‘‘of age’’, then the operator 

of an online gambling service would use one or more independent data service companies (such as those currently in use to verify age and identity online for shipment 

of alcohol or tobacco) to test whether the name and address match the date of birth 

provided. These independent data service companies use a variety of specialized 

databases, (including credit data, driver’s license and voter information) to cross-reference and verify the identity and age of the individual. 

A failure to verify either age or identity would mean that the customer may not 

open an account. The customer may, however, have the option of providing physical 

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copies of identifying records (such as a driver’s license or passport) for further review by the operator. 

I would add that in a well regulated environment, the use of a credit card alone 

for age verification would be prohibited as a source of verification, as the use of 

credit cards for age verification is a violation of most credit card company terms and 

conditions. Also, potential improper access to others’ credit cards by minors prohibits this as an effective control. 

Even if a customer’s age and identity successfully pass each of the steps above, 

the verification process does not end there. The social security number provided by 

the customer would be used to generate a list of personalized challenge questions 

(concerning, for example, previous cars registered, previous addresses, etc.), all of 

which the customer would have to answer correctly before an account is opened. 

Again, the goal is to ensure that the customer is who s/he says s/he is and of the 

age represented. 

After an operator has performed the challenge questions and confirmed that a 

person is who they say they are, at registration, each player will be mandated to 

register with biometric confirmation—facial and/or voice recognition, as I demonstrated in the Hearing. This requirement will preclude anyone from 

assuming someone else’s identity on subsequent log ins; all but eliminating the 

issues some have raised with minors using their parents’ or others’ credit cards and 

also providing additional protections on fraudulent transactions by third parties. 

Only if all of these steps are successfully completed could the operator permit a 

customer to open an account in a well regulated environment. 

While identification of the customer when registering for play is accomplished by 

cross-matching government issued ID and other information customers supply using 

the specialized databases and biometrics described above, there are a number of additional tools available to operators and regulators. For example, a confirmation letter might be sent subsequent to the opening of an account to the address listed on 

government issued identification. This process would be similar to that used when 

a PIN number is changed with an airline, or bank, that serves as a notification that 

an account has been opened. 

Log-in—Verification of a player’s identity would not end at the player/account registration process. On log-in, the player would either use voice recognition and/or facial recognition through their mobile device as part of the log-in process. This will 

not only accurately pinpoint the location of the player to within meters of their location (verifying whether a player is or is not in a jurisdiction that permits online 

poker play) but it will also assure that the player is the original player—the same 

adult—who created the account. 

Cash-out—Cash-out also provides an opportunity to verify a customer’s identity. 

After a request by a customer to cash-out, the operator would send a request to the 

player’s mobile device (separate and apart from their computer) in order to validate 

the player’s identity either through voice or facial recognition. At the same time, 

through geo-location technology, the location of the player will be triangulated and 

this information is stored for full audit use by the operator and regulator. As an 

additional protection, players could also be required to submit a valid photo ID as 

well as proof of residency at the time of their 1st cash-out. 

The best strategy to achieve reliable and secure geo-location is a multi-pronged 

approach that incorporates data from various sources. 

Beginning with the user’s first interaction with the system—registration: personal 

information (name, driver’s license #, address, phone #, etc.) is collected and stored, 

along with his/her IP address, and a ‘‘Device ID’’ for the computer (e.g., laptop). 

This data is then verified with a service that can score the identity’s veracity and 

fraud profile (including age verification, address velocity calculation, connections to 

previous data used in fraud, etc. . .). 

IdentityX enrollment is also a part of this registration process, which begins collecting GPS information and the IP addresses used by the mobile device. 

All of this data is then used to determine the user’s location at a given time. For 

example: 

• The user’s personal information scores highly for legitimacy, and low for fraud. 

• The user’s IP address is used, in combination with personal information, to estimate the user’s location to an allowable area. 

• The user’s GPS coordinates are consistent with the above data and in the allowable area. 

• User is then allowed access. 

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Human reviewers can be employed only in cases where the system has flagged 

the user as having an unusually high risk/fraud profile and/or GPS and IP indicates 

the user is outside of bounds. 

The Nexus Between Regulation and Technology 

It’s important to remember that regulators control the thresholds for accepting, 

rejecting or requiring further information concerning customer identity verification, 

and can impose additional requirements that can further mitigate/eliminate relevant risks. Regulations can establish requirements based on the levels of assurance 

that are necessary to allow a customer to gamble, thereby fine-tuning the balance 

between failing to detect an underage individual and rejecting a player who is of 

the legal age. In other words, regulatory requirements can ‘‘turn up the dial’’ with 

respect to unknown or suspicious entrants to a site, which has the effect of minimizing the potential harm if a customer falls into a grey area. States should be free 

to establish policies and procedures that exceed mandated Federal standards and 

protections. By implementing a solution that embraces flexibility, through the union 

of complementary technologies, regulators are empowered to effectively tune this 

dial based on the needs of the public. 

I would like to thank Senator Ayotte for providing me the opportunity to elaborate 

on the nuts-and-bolts of the technologies and systems that I demonstrated at the 

hearing. I appreciate and share her concerns about the potential for fraud, corruption, and money laundering associated with unregulated or poorly regulated online 

gaming and other forms of Ecommerce. I am happy to answer any additional questions or otherwise provide assistance. 

Æ