STATEMENT FROM JEFFREY A. MODISETT
HOUSE SUBCOMMITTEE ON CRIME, TERRORISM AND HOMELAND SECURITY
HEARING ON INTERNET GAMBLING
APRIL 29, 2003
Mr. Chairman and members of the Committee, let me begin by thanking you for the opportunity to testify today on this complex issue.
It is difficult to discuss my opinion on the topics at issue today without putting it in the context of my personal experience and so, with your permission, I would like to briefly mention the more relevant part of my background.
Upon graduation from Yale Law School and following a clerkship with a federal judge, I began my career as an Assistant U.S. Attorney in Los Angeles. In time, I became the Deputy Chief of the Public Corruption and Government Fraud Unit, specializing in the prosecution of violations of the U.S. Export Control laws. In 1988, I returned to my home state of Indiana to work for Evan Bayh (now Senator Bayh), first on his successful gubernatorial campaign and then as his Executive Assistant for Public Safety. In this capacity, I served as Governor Bayh’s liaison to the State Police, Department of Correction, and National Guard, as well as headed up the state’s efforts in the war on drugs. In 1990, I was elected Prosecuting Attorney for Marion County, Indiana, which is the City of Indianapolis. In 1996, I was elected state attorney general.
As attorney general, I issued official opinions, including one on Internet gaming. That Official Opinion, by the way, concluded that Internet gaming is illegal in Indiana. At the Governor’s request, I also chaired the state’s Gambling Impact Study Commission. The Commission met for two years and issued a lengthy report in December 1999.
Today, the committee has before it two bills, H.R. 21 and H.R. 1223, which pursue two very different approaches to Internet gambling. To oversimplify, H.R. 21 seeks to enforce a prohibition on Internet gambling, while H.R. 1223 seeks to create a commission to determine how states and the federal government might work together to license and regulate Internet gaming. Personally, I believe that H.R. 21 has great surface appeal, especially (of course) for those who oppose gambling in all forms. However, it is my opinion that H.R. 1223 is the preferable approach; the reasons for this will be the focus of my testimony.
Internet gambling raises many thorny issues. There are the social, fiscal, and economic impacts of all legalized gambling – which were the focus of our two-year study in Indiana. There is a question of political philosophy, that is, how much should the government do to protect people from themselves, and to what extent the freedoms of the many should be restricted to protect the vulnerabilities of the few. There is the perplexing question of how to apply the varying state and federal laws and regulations to transactions that are trans-jurisdictional by their very nature. Finally, there are more nuanced questions about the differences among sportsbook, casino-style, lottery, pari-mutuel and other forms of gaming, and how the law should treat each of these.
In dealing with all of these things, there are a few points upon which I believe we all agree. I believe we all seek to minimize the adverse consequences that can accompany gambling – we must do all we can to prevent gambling by minors, we must be vigilant to identify pathological gambling and have the tools and resources for dealing with it when we find it, and we must investigate the potential for money laundering. I also think we all agree that most Americans today have the option to gamble if they so choose – only three states prohibit all gambling, and even in those states, illegal gambling is an option. There is no legal sports betting outside of Nevada, and yet there is plenty of sports betting across the country. And, I think we can all agree that Americans who want to gamble on the Internet are almost certainly going to be able to do so – they can today, and they will be able to do so in the future. Unless the federal government wants to take draconian steps that would adversely affect both the Internet and personal privacy, people who want to bet on the Internet will be able to do so.
As I mentioned earlier, as Indiana Attorney General, I issued an Official Opinion, which still has precedential authority in Indiana. In that Opinion, I wrote that under Indiana law only gambling that is specifically authorized by statute is legal. Since there are no references to Internet gaming in the Indiana Code, it is not legal – even though gambling on riverboats, on horse races, and by lotteries are explicitly permitted in some fashion. I also warned in that Opinion that many Hoosiers were likely gambling over the Internet anyway, and that therefore parents especially should be mindful of how easy it is to gamble on-line. This Opinion was widely interpreted as calling prospectively for the outright prohibition of gambling on the Internet, which was not accurate. As attorney general, I had an obligation to advise my constituents on Indiana law as it then existed. But my Opinion, as reinforced by my service on the state Gambling Impact Study Commission and other experiences, was and is more complicated and nuanced than the position advanced by the prohibitionists.
I submit that the best antidote to an unregulated offshore Internet gambling industry is a fully-licensed, highly-regulated on-shore Internet gambling industry based on strict American standards and priorities. I would further suggest that the enforcement mechanism proposed in Congressman Leach’s bill – while well-intended - is likely to be ineffective, counter-productive, and prone to unintended consequences.
Problems with the Leach bill.
H.R. 21 seeks to have the financial institutions operating in America prevent Americans from using financial instruments to place on-line wagers. It would have the Department of the Treasury adopt regulations aimed at blocking such wagers, and would empower state and local law enforcement to seek injunctions to require financial institutions to take additional enforcement steps.
I am aware that one of the ostensible reasons for this effort is a fear that Internet gambling will provide an avenue for money laundering. Frankly, I find this assertion strange, given that the majority of Internet wagers are placed by credit cards, and credit card transactions are almost always transparent. I do not believe that the Leach bill will stop Americans from gambling on the Internet; however, I do believe it will change the manner in which they do so.
If Internet gamblers cannot use their credit cards, many (perhaps most) of them will instead opt for e-cash accounts, electronic funds transfers, wire transfers to accounts at offshore banks, and other less visible means to settle their accounts. Presumably, the bills’ sponsors proceed from the assumption that added inconvenience will dissuade many or most gamblers from betting on-line. It is impossible to predict, but none of the foregoing financial transactions are particularly difficult to execute. The added inconvenience might stop a few people who are rare or only occasional bettors. But it will certainly not stop experienced gamblers, including problem gamblers.
What this legislation will do, however, is potentially worsen the very problem that it sets out to solve. To the extent that there is a potential for money laundering in the Internet gaming space, creating a market for less transparent payment solutions will presumably make illicit activities, including money laundering, substantially worse. The obvious response to the Leach bill by the offshore industry will be to create payment solutions that U.S. law enforcement and U.S. banks cannot easily “see” – that is, their transactions will be harder to trace. Creating a market for blind e-cash is not the way to stop money laundering.
Admittedly, the commission envisioned by H.R. 1223 would have a difficult job. The members would have to determine how best to preserve state prerogatives in an Interstate medium. They would have to provide guidance on which regulations will keep minors and pathological gamblers from betting on-line, at least affording the same level of protections as exist in land-based casinos. The would have to recommend means to protect against money laundering. They would have to ensure the fairness of games and ensure that winnings are paid out. Finally, they would have to figure out how to appropriately tax the proceeds of Internet wagers.
But if this is achieved, the results would solve many of the problems that the prohibitionists sincerely want to solve. In a licensed environment, it is possible to verify identity on-line using PIN numbers and out-of-session contacts. This and other technology could be used to help ensure no minors gamble on the Internet. Because all Internet gaming transactions are recorded, it is actually easier to track problem gamblers in the cyberworld than in a brick-and-mortar casino. Self-exclusion and pre-set loss limits are more easily accomplished.
Another benefit would be economic – instead of flowing offshore, the money wagered on the Internet would remain in the U.S. and help build the economies of the regulating states. One may oppose gambling for various reasons, but it is undeniable that local economies have benefited from gambling and state and local governments have gained revenues from it. States could also collect taxes on Internet gambling that they are losing today (from both casinos and bettors); this would help with the substantial budget shortfalls most states now face. I would not propose Internet gaming as a way of fixing state deficits, but I would suggest that the revenue generated from American bettors in cyberspace should help the United States and not Netherland Antilles or the Grand Cayman Islands.
I should be clear: I most certainly am not an advocate of H.R. 1223 for economic reasons. I think there are better ways for government to improve people’s lives economically. But I do think it is short-sighted to think that we can have any significant impact on such a huge industry as Internet gaming by convincing ourselves that we can stop offshore cybergaming at the border. Instead, and most importantly, we should minimize and marginalize the offshore Internet gaming industry by developing a fully-licensed, highly-regulated industry in the U.S. We should use the marketplace to “suck all of the oxygen” out of the offshore industry. U.S. customers prefer U.S. brands and U.S. companies would quickly dominate the market. In terms of the U.S. market, much of the offshore industry would probably give up entirely and shift their focus from the U.S. to other countries where they might have a better chance of competing successfully. In the meantime, U.S. companies would set the standard for fairness and honesty because they would be operating under a fully transparent regulatory regime.
In fact, dozens of countries have already begun the process of licensing and regulating Internet gambling – most notably the United Kingdom. The U.K.’s licensing and regulation regime will be complete soon, and Australia, Denmark and other countries have legalized it as well. We can benefit from their learning process and improve upon it.
Mr. Chairman, when Evan Bayh became Governor of Indiana in 1989, he did not support gambling, but the people spoke and voted for a repeal of our Constitutional ban on gambling. Soon, lawmakers passed a state lottery followed by riverboat gambling. Governor Bayh concluded that if gambling was to be legal in Indiana, he would appoint people of unquestionable integrity to head up the regulatory effort. He appointed a federal prosecutor as the Executive Director of the state gaming commission and the commission passed tough regulations and made clear from the outset that tough enforcement would be used against any law violators. As a result, we had a remarkably clean operation from Day One. The federal government should also acknowledge now that Internet gaming will continue to grow in America and we should appoint tough, fair-minded people with integrity to develop model approaches and help establish international standards for Internet gaming regulation.
In summary, I do not believe that the choice before this subcommittee is whether or not there will be Internet gambling in the U.S. – there most certainly will be. The question is what sort of Internet gambling there will be. Under H.R. 21, it will be an unlicensed, unregulated industry where the federal and state governments afford no protection to players, to minors or to problem gamblers, and it will be funded by less-than-transparent transactions, with no economic benefit or tax revenue accruing to the U.S. Under H.R. 1223, there is the potential for a tightly-regulated industry overseen by Americans of integrity bolstered by laws and regulations that provide substantial protections for minors and problem gamblers, remove any potential for money laundering, and provide economic benefit and tax revenue in the United States.
Once again, I thank you for the opportunity to testify, and I look forward to the question and answer session.