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 Mr. Chairman and Members of the Subcommittee:

Thank you for inviting me to testify today. The issue before this Subcommittee is one of singular importance, and I commend the Subcommittee for holding this hearing. I would also like to commend Congressman Leach, as well as Congressman Goodlatte and Senator Kyl, for their tireless efforts and longstanding commitment to provide law enforcement with additional tools to combat Internet gambling. Today I am pleased to offer the views of the Department of Justice about Internet gambling, including the potential for gambling by minors and compulsive gamblers, the potential for fraud and money laundering, and the potential for infiltration by organized crime. The Department of Justice generally supports the efforts of the drafters of H.R. 21 and S. 627 to enable law enforcement to cut off the transfer of funds to and from illegal Internet gambling businesses. With respect to H.R. 1223, the Department has concerns, which I shall address below, about the feasibility and desirability of regulating Internet gambling.

As you all know, the number of Internet gambling sites has increased substantially in recent years. While there were approximately 700 Internet gambling sites in 1999, it is estimated that by the end of 2003, there will be approximately 1,800 such sites generating around $4.2 billion. In addition to on-line casino-style gambling sites, there are numerous off-shore sports books operations that take bets both over the Internet and via the telephone. These developments are of great concern to the United States Department of Justice, particularly because many of these operations are currently accepting bets from United States citizens, when it is illegal to do so.

The Internet and other emerging technologies, such as interactive television, have made possible types of gambling that were not feasible a few years ago. For example, a United States citizen can now, from his or her home at any hour of the day or night, participate in an interactive Internet poker game operated by a computer located in the Caribbean. Indeed, a tech-savvy gambler can route his bets through computers located in other countries, thereby obscuring the fact that he is placing his bet from the United States.

Gambling by Minors

On-line gambling also makes it far more difficult to prevent minors from gambling. Unlike traditional physical casinos and Off-Track-Betting parlors, the operators of gambling websites cannot look at their customers to assess their age and request photo identification. Currently, Internet gambling businesses have no reliable way of confirming that gamblers on their website are not minors who have gained access to a credit card. Although some companies are developing software to try to detect whether a player is old enough to gamble or whether that player is from a legal jurisdiction, such software has not been perfected and would, of course, be subject to the same types of flaws and vulnerabilities that could be exploited by hackers.

Compulsive Gambling

Unlike on-site gambling, on-line gambling is readily available to anyone with an Internet connection at all hours of the day or night. This presents a particular danger for compulsive gamblers. As was recently pointed out by the American Psychiatric Society: “Internet gambling, unlike many other forms of gambling activity, is a solitary activity, which makes it even more dangerous; people can gamble uninterrupted and undetected for unlimited periods of time.” Indeed, the problems associated with pathological and problem gamblers, a frighteningly-large percentage of which are young people, are well-established and can be measured in the ruined lives of both the gamblers themselves and their families.

Potential for Fraud

Although there are certainly legitimate companies that either are operating or want to operate on-line casinos in an honest manner, the potential for fraud connected with casinos and bookmaking operations in the virtual world is far greater than in the physical realm. On-line casinos and bookmaking establishments operate in many countries where effective regulation and law enforcement is minimal or non-existent. Start-up costs are relatively low, and cheap servers and unsophisticated software are readily-available. Like scam telemarketing operations, on-line gambling establishments appear and disappear with regularity, collecting from losers and not paying winners, and with little fear of being apprehended and prosecuted.

Through slight alterations of the software, unscrupulous gambling operations can manipulate the odds in their favor, make unauthorized credit card charges to the accounts of unsuspecting gamblers, or alter their own accounts to skim money. There is also a danger that hackers can manipulate the online games in their favor or can steal credit card or other information about other gamblers using the site.

Potential for Organized Crime

Additionally, the Department of Justice is concerned about the potential involvement of organized crime in Internet gambling. Traditionally, gambling has been one of the staple activities in which organized crime has been involved, and many indictments brought against organized crime members have included gambling charges. We have now seen evidence that organized crime is moving into Internet gambling.

Internet Gambling Violates Federal law

Most of these gambling businesses operate offshore in foreign jurisdictions. If they are accepting bets or wagers from customers located in the United States, then these businesses are violating federal laws, including Sections 1084, 1952, and 1955 of Title 18, United States Code. While the United States can indict these companies or the individuals operating these companies, it may be difficult to bring them to trial in the United States.

Money Laundering and Internet Gambling

Another major concern that the Department of Justice has about on-line gambling is that such businesses provide criminals with an easy and excellent vehicle for money laundering. This is due in large part to the cash-intensive nature of the industry, the fact that most Internet gambling sites are located offshore, and the volume, speed, and international reach of Internet transactions.

It is a fact that money launderers have to go to financial institutions to conceal their illegal funds and to recycle those funds back into the economy for their use. Because criminals are well aware of the fact that banks are now subject to greater scrutiny and regulation, they have -- not surprisingly -- turned to other non-bank financial institutions to launder their money. On-line casinos are a particularly inviting target because, in addition to using the gambling that on-line casinos offer as a way to hide or transfer money, on-line casinos offer a broad array of financial services to their customers, such as providing credit accounts, fund transmittal services, check cashing services, and currency exchange services.

Individuals wanting to launder ill-gotten gains through an on-line casino can do so in a variety of ways. For example, a customer could establish an account with a casino using illegally-derived proceeds, conduct a minimal amount of betting or engage in offsetting bets with an overseas confederate, and then request repayment from the casino, thereby providing a new “source” of the funds. If a gambler wants to transfer money to an inside source in the casino, who may be located in another country, he can just play until he loses the requisite amount. Similarly, if an insider wants to transfer money to the gambler, perhaps as payment for some illicit activity, he can rig the game so the bettor wins.

The anonymous nature of the Internet and the use of encryption make it difficult to trace the transactions. Further, the gambling business may not maintain the transaction records, in which case tracing may be impossible. While regulators in the United States can visit physical casinos, observe their operations, and examine their books and records to ensure compliance with regulations, this is far more difficult, if not impossible, with virtual casinos.

Comments on H.R. 1223

If enacted, H.R. 1223 would establish a Commission to study the existing legal framework governing Internet gambling and the issues involved with the licensing and regulation of Internet gambling. Among the topics to be studied, the Commission would review existing law, assess the impact of Internet gambling on problem gamblers and minors, assess the susceptibility of Internet gambling to money laundering, and study the potential of regulatory measures to minimize any adverse problems. As I previously stated, the Department has concerns about these and other issues as they relate to Internet gambling. At this time, the Department believes that Internet gambling should be prohibited for many of the reasons I have mentioned, as well as others cited by the Congressionally-created National Gambling Impact Study Commission in its 1999 Report recommending that Internet gambling be prohibited. Moreover, given differences in state law on the issue of gambling in general, and given the fact that Internet gamblers could come from any state, the Department also has concerns that such regulation would need to ensure that the laws of all states were taken into consideration when analyzing this issue.

While the Department would not necessarily oppose per se a Commission that would revisit these issues and make recommendations on the feasibility of regulating Internet gambling, H.R. 1223 provides that this Commission shall issue proposed changes to Federal law and regulations to provide for the licensing and regulation of Internet gambling in the United States. This requirement appears to preordain the outcome of the Commission’s study and not permit this Commission to reach the same conclusion that the National Gambling Impact Study Commission reached just four years ago, to wit, that Internet gambling be prohibited and not regulated.

Our review of H.R. 1223 is continuing, and we may have additional comments at a later date. But if Congress elects to consider legislation, such as H.R. 1223, that could, in theory, eventually lead to the legalization of Internet gambling, it will be very important to bear in mind and emphasize the debilitating and potentially disastrous consequences of such a step that I noted previously – namely, the problems of underage gambling, addictive gambling, and fraud, as well as the possibility of organized crime involvement.

Even if H.R. 1223 is enacted, that should not preclude action on H.R. 21 and S. 627, since these bills apply only to “unlawful Internet gambling” and would not be applicable to lawful Internet gambling. Given that illegal gambling exists in the physical world despite the availability of legalized forms of gambling in many states, there is every reason to believe that unlawful gambling would continue to exist in the cyber world even if the United States were to regulate Internet gambling.

Comments on H.R. 21

The Department has several comments on H.R. 21. First, the Justice Department believes that H.R. 21 should apply to all means of wagering that derive from the Internet. Many offshore sports books accept wagers both over the telephone and over the Internet. As drafted, H.R. 21 is only applicable to Internet gambling, so an otherwise illegal site could avoid the bill's prohibitions by directing that wagers be placed over the phone rather than via the Internet. The bill should apply to all unlawful Internet gambling regardless of the communications medium being used to place bets.

Second, the Justice Department opposes provisions of H.R. 21 that weaken or alter existing federal law or standards. The Justice Department recognizes the important role that federal regulators play in regulating federally-insured financial institutions and is currently discussing with the Treasury Department procedures whereby injunctive relief would only be sought in full coordination with the appropriate federal financial regulator. Nonetheless, the Justice Department believes that Rule 65 of the Federal Rules of Civil Procedure should be the sole standard used by courts in considering whether to grant injunctive relief. Section 3(c)(5)(B) of H.R. 21 sets forth additional factors that the district court must consider in determining whether to grant injunctive relief against certain entities, including credit card issuers and financial institutions. Rule 65 is the well-established standard used in federal courts throughout the country in all cases in which a party is seeking injunctive relief, and the Department opposes any attempt to alter existing federal standards for the benefit of specific entities. Moreover, the Department believes that, under a standard Rule 65 analysis, a district court would already have the discretion to consider the listed factors.

For the same reason, the Justice Department opposes Section 3(c)(4)(B) of H.R. 21, which provides, in essence, that interactive service providers that are not liable under H.R. 21 shall not be liable under Section 1084 of Title 18, United States Code, unless the ISP has actual knowledge of the bets and wagers and owns, controls, operates, manages, supervises, or directs a website at which unlawful bets or wagers are offered, placed, or received. This provision constructively amends Section 1084, an existing federal criminal statute, and weakens its application by imposing a far higher standard of liability than traditional aiding and abetting liability, which applies to everyone else who must comply with the law. While the Department does not believe that ISPs should be singled out for particularly harsh treatment (and our “track record” bears this out), we do not believe that ISPs should be singled out for uniquely favorable treatment either.

Third, the Justice Department has other concerns about how the bill treats ISPs, particularly as it pertains to the removal of Internet gambling websites and the cessation of ancillary services connected to those sites. We are, however, working diligently with representatives from several prominent interactive service providers to resolve this concern.

Conclusion

On behalf of the Department of Justice, I want to thank you again for inviting me to testify today. We thank you for your support over the years and reaffirm our commitment to work with Congress to address the significant issue of Internet gambling. I will be happy to answer any questions that you might have.

 
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