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June 20, 2000, Tuesday

SECTION: PREPARED TESTIMONY

LENGTH: 2911 words

HEADLINE: PREPARED TESTIMONY OF RICHARD C. LEONE

BEFORE THE HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES

SUBJECT - "INTERNET GAMBLING FUNDING PROHIBITION ACT" (H.R. 4419)

BODY:
Chairman Leach, members of the Committee, thank you for the invitation to appear. The comments that I offer today are personal, reflecting my service as a member of the National Gambling Impact Study Commission (NGISC), my experience in government, including a term as State Treasurer of New Jersey, my years in the financial industry, including a period as president of a commodity futures exchange, and my time teaching public finance at Princeton University.

The story of the regulation of gambling Over the last generation could appropriately be entitled: "Too Little, Too Late." To paraphrase the NGISC report: Since the mid-1970s, we have changed from a nation in which legal gambling activity was extremely rare - casinos in only one state, a handful of state lotteries, and fairly common, but small- scale, parimutuel activities - to a country in which legal gambling, in one form or another, is permitted in 48 states. Commercial gambling has become an immense industry. Governments, too, are heavily involved in the increasingly active pursuit of gambling revenues, either directly through lotteries and similar government-operated gambling or through taxes and permit fees for commercial gambling. A whole new category of governments - tribal nations - also has emerged as leaders in the proliferation of gambling activities. I doubt that even the most ardent early advocate of gambling would have had the boldness to produce a master plan that envisaged moving the nation as far and as fast as we have come. Indeed, all nine members of the Commission, including the representatives of the gambling industry, were in agreement on the general proposition that we have gone faster than makes sense. We were particularly concerned with the spread of games with little regulatory oversight and no effective screens against participation by the young and the vulnerable. That is why we unanimously agreed that the national government should seek a method to ban gambling over the Internet.

Let me say at the outset that, in my judgment, H.R. 4419 represents, potentially, the most effective step in this direction so far.

During the research and hearing phase of the Commission's work, we heard from those who argued that the Internet represents a special case - a zone of particular freedom that government should simply leave alone. This contention seems to me extreme and unwarranted. I understand the simple, if selfish, urge to avoid sales taxes, for example. But do Internet users really want to do business in an environment that is literally outside the law? No one is trying, as far as I know, to claim that these long distance transactions should not be subject to other commercial and criminal statutes. No one, I think, argues that the standard laws regarding fraud should not be applied to those who bilk customers over the Internet. And, we certainly want to insist that the growing volume of securities transactions on the Web be subject to the same regulations and statutes that apply to traditional securities trading. In short, the question is not whether the law should extend to the Internet; it surely does. The question is what sort of laws do we need.

So I start with a premise that we should be developing appropriate public policies for the Internet in general. I recognize that there are especially complex questions in this area, but I simply do not believe that the answers are somehow permanently beyond the ability of the Congress. My guess is that, in a decade or two, we shall have a body of well-established law pertaining to many Internet-related issues that now seem esoteric or even baffling. For gambling in particular, I would argue that we need to be about the business of setting up that legal framework ASAP.

I have a few personal observations on the bill, but let me first share with you the way our Commission approached the issue of Internet gambling and the conclusions that are embodied in our final report. In part, those conclusions bear directly on the legislation before the Banking Committee today.

Overall, the studies that we looked at all suggested that, like other online activities, gambling over the Internet is growing very rapidly. Although no one has definitive numbers, it is fair to say that the amounts wagered almost certainly have moved from the hundreds of millions into the billions per year. One recent analysis estimates that gambling revenues will hit nearly $1.5 billion this year and rise to more than $3 billion by 2002. The same study by Christiansen Capital Advisors projected the number of players, world wide, at 52 million in two years. About fifty countries have authorized some form of Internet gambling. The founder of Virgin Atlantic is working with Microsoft on a proposal to operate Britain's national lottery over the Internet and through mobile phones. The proliferation of gambling online has extended to just about every category of betting, including lotteries, virtual casinos, sweepstakes, horse racing, and sports wagering. This rapid expansion has attracted the attention of investors; Bloomberg News reported in 1999 that "shares of companies planning to offer gambling online were among the biggest gainers in U.S. stock markets."

Unlike the regulatory regimes that have accompanied the expansion of other forms of gambling in the United States, the explosion of activity on the Internet has taken place without any regulatory framework at all. As our report noted, the gambling industry believes strongly in the rule: "know your customer," but this precaution is sometimes impractical, if not impossible on the Web. Moreover, a gambler has an obvious interest in knowing with whom he is placing a bet. The task of obtaining such information on the Internet - a world in which even names are not always what they seem - is daunting. Basic questions are up for grabs. Are the odds as advertised? Are the winners rigged? Who ensures that the advertised payout is, in fact, honored? Will they pay off on a big win? Are the owners of the games legitimate?

Because of its offshore, hard-to-pin-down character, online betting has been identified by law enforcement experts as an obvious place for money laundering, either by the "house" or the customer, or both. With all the concerns about privacy on the Internet, it may seem strange to find a problem that essentially is generated by the anonymity of an online activity. But, the potential for recycling ill-gotten gains through Internet gambling presents a new challenge for the financial and law enforcement communities.

Commission members were especially concerned about the access for underage gamblers opened up by the use of the Internet. We looked at evidence demonstrating that young people are the most intensive users of the Internet. They are creative and knowledgeable about this new medium. But they are also young and impressionable. Experimenting with gambling may seem a harmless youthful fancy. But like other potentially destructive activities, society has a clear interest in reducing the chances that such experiences will warp the development of our youth. Moreover, the combination of a gambling medium where it is especially difficult to control underage participation and where there is rapid growth in sports betting - including betting on intercollegiate events - is potentially incendiary. We found that every organized sports group and league in the United States opposed legalizing sports gambling in general and its spread on the Web in particular.

Finally, our research indicated that we have a growing number of problem and pathological gamblers in America.

We are just beginning to address this problem and calculate its costs. The casino industry is supporting limited research, but, sadly, it has been difficult to get this matter on the radar screen of the major federal funders of research on addictive behaviors. The states, too, in their blatant advocacy of lotteries, are, with a few important exceptions, not doing much. In this environment, are we really ready for a potentially exponential increase in gambling activity? The answer should be obvious.

Again speaking personally, I wonder if it is not in the nature of the Internet to cater to impulsive, not well thought-out, interaction. Compare the average email to a well-crafted memo or letter. The sheer magnitude of offerings on the Web supplies ample opportunity for impulsive and careless behavior, exactly the sort of thing we want to discourage if we wish to minimize problem and pathological gambling behavior. In the unregulated world of the Internet, how do we even think about beginning to protect people from the casual, easy bet that grows into addiction?

We debated a number of alternate approaches to dealing with this set of problems and received considerable advice from interested groups. For example, as this Committee knows, it is the hope of some in the Internet gambling world that Congress will not ban, but rather will regulate games on the Web. The idea, of course, is to turn these activities into mainstream businesses built on the model of the extremely successful casino firms. Our Commission rejected that approach. In fact, despite our differences on other matters, we unanimously concluded that an outright ban on Internet gambling would be best for America at this time. We recognized that it has been difficult to retard the growth of gambling in other areas, but we felt that, despite the obvious technical and legal questions, the public interest on this question was clear.

Our conclusions may well be affirmed by Australia's attempt to regulate online gambling. Even with regulations in place, concern over problem gambling remains high in that country and has prompted the government to investigate the feasibility of an outright ban.

I believe, as well, that it is important to separate the issues raised by online gambling from the more general debate about gambling in the United States. As the NGISC members found,regardless of how you feel about gambling in other contexts, the introduction of this new form into millions of homes is a disturbing development. That is why, despite our diversity of views, we were unanimous in advocating a ban.

As the pro-gambling members of our group pointed out, many Americans do not mind gambling in a controlled environment, where players are protected, the games are not rigged, the odds are readily available, and children are excluded. But gambling at home, whether on a computer monitor or a TV screen is something quite different. It is, quite frankly, an intrusion into family life. Are parents supposed to discourage their children from using a computer in order to shield them from casinos online? Should they hide their credit cards? Why, in fact, should they be forced to deal with this issue at all?

America, today, offers numerous opportunities for those adults who want to gamble. Do we really need to make the practice more casual? To bring it into the home? More generally, the fact that you want something to be legal, doesn't mean that you want it everywhere. We restrict all sorts of things that are not in themselves illegal. (Because we permit eighteen wheelers, it doesn't mean that they belong on residential streets.)

Although our Commission also had a bias in favor of state regulation of gambling, we all recognized the necessity for federal leadership in this area. This bill creates a new national role where one is needed. It is ingenious in targeting the sources of revenue for Internet operators. I expect that some of the credit card and bank people will claim to be mere bystanders, but I find that argument unpersuasive. This bill can help to fill a real gap in current regulation of gambling in the United States. As a former state treasurer, I also have a very pro-state government bias, but like the Association of State Attorneys General and other state officials, I believe that only the federal government can be effective in the area of Internet gambling.

Others are better qualified to judge the technical features of H.R. 4419, but I applaud its boldness. We must be aggressive about trying to slow down the growth of online gambling - a process that is currently out of control. In fact, I urge the Committee to look at other ways to squeeze the online operators. Could there be a law, for example, that creates opportunities for citizens to declare that any gambling debts that they incur on the Internet are uncollectible in the United States - even if they are generated from off-shore bank accounts? This approach would build on some of the recent court decisions about gambling debts in general. This approach also might build a strong backfire against the forces trying to suck the unwary into Internet gambling. Who knows? It might even appeal to the libertarian strain among Internet users. If nothing else, it will encourage operators to stay away from activities that result in large debts by players.

I am sure that this Committee will hear from witnesses who stress that gambling online is essentially unstoppable. Our Commission heard the same thing about other forms of gambling. But I hope that the Congress will conclude, as we did, that, while the problems of constraining gambling are not simple, there is still a strong case for government action. In the case of Internet gambling it would be an important first step to put sand in the wheels, in effect, and make it harder for gambling online to prosper. That is one of the things that H.R. 4419 can do. If enacted, it will make it much harder for online gambling to exploit U.S. customers. At a minimum, it will help to buy us time that we need to find better ways to deal with the challenge of problem and pathological gamblers and the growing culture of wagering in American life.

Finally, I find it remarkable that while we have extensive programs to deal with other popular activities that have damaging side-effects - alcohol and tobacco come to mind - we are still at a primitive stage, both in terms of understanding and of public policy, in the area of gambling problems. Sensible people on both sides of the gambling issue know that is true. I hope, therefore, that they come together to slow down this latest race for a fast buck by the promoters of gambling online.

Mr. Chairman, I wish you good fortune with this important piece of legislation and thank you again for the opportunity to appear today.

END

LOAD-DATE: June 22, 2000

Document 32 of 142.


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