Senate Committee Holds Hearing on Internet Gambling Bill

March 18, 2003. The Senate Banking Committee held a hearing on proposals to regulate illegal internet gambling. The hearing focused on HR 21 and S 627, both of which would attempt to bar internet gambling operations access to the U.S. financial services system by banning the use of credit cards, wire transfers, or any other bank instrument to fund gambling transactions. The two bills are not identical. Senators expressed support for the legislation.

On March 13, the House Financial Services Committee approved the House version of the bill, HR 21, titled the "Unlawful Internet Gambling Funding Prohibition Act of 2003".

The Senate version of the bill, S 627, which is also titled the "Unlawful Internet Gambling Funding Prohibition Act", was introduced on March 13 by Sen. Jon Kyl (R-AZ), Sen. Dianne Feinstein (D-CA), and Sen. Richard Shelby (R-AL). See also, PDF copy of S 627.

Five Senators participated in the hearing. Sen. Shelby, the Chairman, presided. Sen. Paul Sarbanes (D-MD), Sen. Chris Dodd (D-CT), and Sen. Tom Carper (D-DE) all spoke and questioned witnesses. Sen. Kyl is not a member of the Committee, but testified as a witness.

Sen. Shelby said in his opening statement that "regulation of gambling has traditionally been a matter of state law. As a conservative Republican, I believe a federal response is appropriate to a social evil only to compliment state or local enforcement. But clearly, internet gambling poses such a problem. Off-shore internet casinos continue to proliferate and illegal internet gambling continues unabated, despite the fact that no state has yet authorized a virtual casino. The very nature of the internet gambling defies regulation at the state or local level. ... Clearly, the casinos themselves are out of the reach of even federal authorities, and can be expected to continue to flaunt U.S. Law. The only available means of effective interdiction is through the media by which the gambler and casino interface -- namely, through the internet service provider or ISP or the payment system provider."

Sen. Sarbanes, the ranking Democrat on the Committee, said in his opening statement the "Offshore Internet gambling could not attract U.S. customers without making use of our payments system. Every Internet gambler must use a credit card, fund transfer, or bank instrument to open and fund an account from which to gamble on a web site." He added that "I am prepared to work with the Chairman and other members on legislation to deal comprehensively with this important subject".

Sen. Dodd stated that "I think it's wise for Congress to consider banning the use of credit cards and other financial instruments in furtherance of online gambling transactions."

Sen. Sarbanes and Sen. Dodd also discussed what is socially responsible in the context of the internet. Sen. Sarbanes said that "The fact that new ways to attract potential gamblers, and facilitate their wagering, are clothed in the aura of the internet, should not change our ideas of what is lawful or socially responsible. This technology is being used to, sort of, cloak basic judgments and considerations of what is appropriate social behavior. So they say, ``well, you know, it is the internet´´. And all of a sudden, since it is the internet, somehow, it has some validity. ... It shouldn't change our ideas of what is wrong or socially responsible."

Sen. Dodd followed up on this. He commented about "this mystical quality, that if it is the internet it must somehow be good. ... But the idea that somehow being associated with it is somehow inherently going to be good, or inevitable, is troubling."

Sen. Kyl (at right) testified in support of his bill, S 627, which he said is "virtually identical" to the House bill. He said that internet gambling leads to money laundering and tax evasion. He also said that "anyone who gambles on the internet is making a sucker bet", referring to non payment of winnings, and tampering with the odds. See also, Sen. Kyl's release.

John Malcolm, a Deputy Assistant Attorney General in the Criminal Division of the Department of Justice (DOJ), provided testimony that mirrored the arguments of the Senators who support the bill. He discussed the problems associated with internet gambling, including gambling by children, involvement of organized crime, and money laundering. He also expressed concern about advertising of internet gambling, because it is giving some people the mistaken view that internet gambling is legal. See, prepared testimony.

Sen. Sarbanes later asked Malcolm for the DOJ's position on HR 21 and S 627. He responded that the DOJ has not yet taken a position, and that it has some concerns with the legislation. A stunned Sen. Sarbanes asked "When does the Department of Justice intend to get involved?". Sen. Sarbanes added, "I suggest that the Justice Department get to work".

Sen. Shelby added, "I can't imagine, this Justice Department, under any circumstances, headed by our former colleague, John Ashcroft, would oppose this legislation."

Former Sen. Ashcroft (R-MO) was a co-sponsor of Sen. Kyl's bill, S 474, the Internet Gambling Prohibition Act of 1997, in the 105th Congress.

Richard Fisher, an attorney with the law firm of Morrison & Foerster, also testified. He said that he has represented financial institutions and payment systems. See, prepared testimony. He said that "It is no small undertaking for payment system participants to block Internet gambling transactions even when they can be identified through coding systems". He added that "any effort to individually examine transactions would threaten the entire operation of the payment systems that all U.S. consumers rely on to conduct instantaneous transactions around town, across the country and throughout the world."

Fisher also said that "Because these systems rely on proper coding by merchants, the blocking may not be complete, for example, if Internet gambling operations miscode authorization messages ... Also, ... blocking payment card transactions may lead to the use of other payment methods and, therefore, may not solve the problem of illegal Internet gambling. In addition, ... some Internet gambling transactions will evade even the most sophisticated detection and blocking mechanisms. For these reasons, any legislation designed to address illegal Internet gambling by focusing on the responsibilities of payment system participants to identify and block such Internet gambling transactions must recognize that mechanisms for achieving this end will not be infallible and that some transactions inevitably will leak through."

Stewart Baker, a lawyer with the law firm of Steptoe & Johnson, testified on behalf of the U.S. Internet Service Provider Association. He offered several general criticisms. See, prepared testimony.

He said that "Internet gambling legislation must not require service providers to block customer access to Internet gambling sites not residing on their networks and not under their control. This type of regulatory scheme is unworkable and will disrupt ecommerce and speech on the Internet."

He also stated that "legislation should contain clear court-ordered notice and takedown procedures ..." He added that "notice and takedown procedures should also give websites an opportunity to appear to refute notices for illegal activity that may not reside on the service providers networks or may not be illegal."

He also said that "service providers should be given immunity from liability for good faith efforts to comply with a notice." Also, "Internet gambling legislation should contain language that clearly states that no service provider has any duty or obligation to monitor its networks for illegal activity, or disable or block customer access to websites not under the service provider's direct control or residing on its network."

Richard Blumenthal, Attorney General of the state of Connecticut, testified on behalf of the National Association of Attorney Generals. He said that legislation should "prohibit the use of credit or debit cards and other financial instruments for Internet gambling". He continued that legislation should have no exceptions, including any exception for state sanctioned gambling. See, prepared testimony.

William Saum, testified on behalf of the National Collegiate Athletic Association (NCAA). He said that "We believe that strong legislation is needed to prohibit gambling over the Internet". See, prepared testimony.

Frank Fahrenkopf, P/CEO of the American Gaming Association, also testified. His group represents brick and mortar and riverboat casinos. It opposes this legislation. See, prepared testimony. Frank Catania testified on behalf of the Interactive Gaming Council, which opposes the proposed legislation. See, prepared testimony.