U.S. Department of the Treasury

(Archived Content)

FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman, Ranking Member LaFalce, and members of the Committee, thank you for the opportunity to present the Treasury Department's views on H.R. 4419, the Internet Gambling Funding Prohibition Act.

We are fortunate to be living in a period of rapid technological progress and solid economic growth. Advances in information technology and the linkages provided by the Internet are dramatically changing how we do business and even how we live. The resulting increases in productivity have helped to fuel the New Economy.

One of the great benefits of the Internet is that it links individuals and businesses in real-time across borders and oceans. It creates a single market where merchants and consumers can do business without having to incur the cost of meeting. It gives consumers greater access to information and democratizes access to quality products. Through innovations like on-line auctions, the Internet can make anyone a seller and anyone a buyer.

With the myriad benefits of this connectivity, however, come some costs. Because the Internet knows no boundaries, it knows no states. Except for the need to convert currency in the event of payment, the experience is no different on an American or Antiguan or Australian website. Because the Internet is stateless, laws are more difficult to apply. Thus, over the past year, we have seen profound effects on copyright, as Internet users share proprietary information freely. As my colleague from the Department of Justice will elaborate, the Internet constitutes a challenge to law enforcement.

Today's hearing concerns one area where these problems are being vividly demonstrated: on-line gambling. As the Internet has revolutionized many industries, it also has affected the gambling industry. A recent report found that as of January 2000, there were 650 Internet gambling sites. In 1999, Internet gambling revenue was $1.2 billion, which was 80 percent

higher than the previous year. Still the Internet gambling sector is small compared to the overall gambling sector: in 1998, only 0.4 percent of adults in the United States gambled on the Internet, whereas over 50 percent had purchased a lottery ticket and over one quarter had gambled in a casino.

No one can doubt the damage that gambling can do. For compulsive gamblers especially, the damage to themselves and their families can be profound.

Thus, we must be concerned by the ability of the Internet to facilitate this sort of compulsive gambling by allowing easy, around-the-clock access from the comfort of one's home or workplace. Internet gambling can also facilitate underage gambling, as minors can log into casinos and lie about their age in order to participate.

As Deputy Assistant Attorney General Di Gregory will describe, operating an on-line casino is already illegal in the United States, but on-line casinos have proliferated overseas. Internet casinos began in the Caribbean, and have spread to South America, Australia and other countries, where they are legal under local law. Regardless of their physical headquarters, they are quite easy to find on the Internet.

Preventing Americans from gambling at overseas Internet casinos is difficult for both legal and practical reasons. Punishing the casino is difficult because its activities are legal in the place it operates. Punishing the gambler would require identifying who is logging onto such sites, a task that would face profound privacy and civil liberties concerns as well as technological obstacles.

I would now like to turn to H.R. 4419, the Internet Gambling Funding Prohibition Act, which provides an innovative, alternative approach to restrict Internet gambling. We look forward to working with the Committee on this important issue.

H.R. 4419 attempts to prevent Internet gambling by severing the link between the gambler and the casino. The bill bans any person engaged in a gambling business from knowingly accepting certain payments from other people participating in Internet gambling. Prohibited payments include credit, electronic funds transfers or funds transmitted through the use of a credit card, check, draft or similar instrument. We are pleased to see that the bill does so in a technology neutral way. It also prohibits financial transactions involving payment through a financial institution or intermediary acting on behalf of the person participating in Internet gambling. Perhaps most significantly, it authorizes regulators to direct financial institutions not to make payments to merchants identified as Internet casinos.

H.R. 4419 represents an innovative approach to the problem of Internet gambling, and does not contain the troubling loopholes that are found in some legislation. However, the bill also presents technological challenges and policy concerns that need to be considered further, including two enforcement provisions that the Treasury Department strongly opposes. We believe, however, that these provisions are not central to the bill, and could be removed without undermining its effectiveness. We also share in the concerns expressed by the Justice Department.

H.R. 4419 is premised on the ability of actors in the payment system to identify and halt payments to Internet casinos. Payment processors are granted a safe harbor for any transaction where they do not know that the payee is involved in Internet gambling. The bill appears to assume that payment processors will either know that a given payee is an Internet gambling business or be informed by the government.

Currently, the majority of Internet gambling transactions are conducted with credit cards. For purposes of tracking transactions, the major credit card companies really fall into two groups. The first group consists of credit card associations owned by member banks, which are responsible for issuing cards to customers and signing up, or acquiring, merchants. The second group includes firms that issue cards and acquire merchants directly.

Based on our discussions with the industry, we believe both types of company can already identify and could probably refuse to authorize payments to Internet gambling businesses. The two major credit card associations allow their members to acquire Internet casinos as merchants if the business is legal in the place it is being conducted. As part of a recent civil litigation settlement, however, one of the credit card associations agreed to assign a merchant category code to Internet casinos. The other association can derive the same information from a combination of codes and fields it assigns to merchants

Direct issuers should have no less ability to identify Internet gambling transactions. One of the direct issuers represented that it no longer signs up any merchant engaged in Internet gambling. However, a search of Internet gambling sites did reveal a few casinos claiming to accept its cards.

A credit card is of course only one payment mechanism, but it is the most important for on-line gambling. First, use of credit cards presents special concerns because gamblers are indebting themselves in order to gamble. Second, credit cards are the most frequently used payment mechanism: some sites even feature pictures of favored credit cards on their home pages. Casinos appear to prefer them for the speed with which gamblers can be registered and begin gambling; gamblers prefer them for that reason, but also because they can charge back in the event of fraud, and can receive payment on winnings quickly and cheaply by having their account credited.

The bill's restrictions would also apply to payments using off-line debit cards (better known as check cards) and on-line debit cards (better known as ATM cards). Currently, almost all off-line debit transactions are processed through two networks owned by the credit card associations. Thus, merchant codes could also be used to block these transactions as well. Currently, on-line debit transactions generally do not take place on the Internet, due to the problems of encrypting the PIN.

Still, there could be ways to avoid these payment restrictions on debit transactions. First, through electronic bill payment, individuals currently authorize payments to merchants. Presumably, such payments could be made to Internet casinos, which we gather would not currently need to be identified as such. Second, some Internet aggregators now accept deposits from consumers - which can come through credit card payments - and allow the consumer to spend that money on-line. Third, there are numerous attempts underway to develop electronic or digital cash - stores of value that can be spent on-line in anonymous peer-to-peer transactions (that is, without involving a bank or other use of the traditional payment system). On-line gift certificates and rewards programs allow consumers to purchase or earn the ability to spend on-line currency at participating merchants. Although casinos do not appear to be among those merchants, systems could be created with that purpose in mind. Thus, while new, anonymous payment mechanisms will be a boon to Internet commerce and even Internet privacy, they will present serious challenges to those attempting to restrict Internet gambling and other illegal conduct.

Finally, all of the credit card issuers have stressed to us that merchants can take other measures to conceal the nature of their businesses. A merchant could submit transactions under different names, or misidentify the nature of its business. And of course nothing would prevent a gambler from simply sending a check to a casino overnight mail.

While most of H.R. 4419 is directed at stopping payments to on-line casinos, it also contains sanctions designed to dissuade other nations from hosting such casinos. The Treasury Department strongly opposes these provisions.

Section 4(b) of the bill would require the Secretary of the Treasury to instruct the U.S. Executive Directors of each international financial institution (IFI) to oppose any non-basic human need loan for any country that the Secretary determines (1) permits a high level of participation in, and the use of the financial payment and transfer systems to facilitate Internet gambling by U.S. citizens and residents; and (2) is not effectively implementing measures to limit such participation and financial system use by U.S. citizens.

This provision undermines the Administration's policy of supporting the institutions' focus on their core missions: poverty reduction, economic growth, and the stabilization of global financial markets. It also would be difficult for Treasury to determine which countries have a high level of participation in Internet gambling or are not effectively implementing measures to limit U.S. citizens' gambling activities. Under this provision, Treasury would be forced to evaluate countries based on the actions of their private citizens and companies, not on the actions of their governments.

Section 4(c) would require the Secretary of the Treasury and the Federal Reserve to take such action as they determine to be appropriate to limit or preclude access to the U.S. payment system by financial institutions that are chartered by, organized under the laws of, or have their principal places of business in a country that permits a high level of participation in Internet gambling by U.S. citizens. This provision may raise questions with our trading partners concerning its consistency with U.S. obligations under international trade agreements.

Mr. Chairman, thank you for the opportunity to appear before the Committee today. We look forward to working with you to resolve the concerns that we and the Justice Department have raised today. I also look forward to answering any questions the Committee may have.