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Committee Reports

106th Congress (1999-2000)

House Report 106-771 - Part 1

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{link: 'http://www.congress.gov:80/cgi-bin/cpquery?',title: 'THOMAS - Committee Report - House Report 106-771 - Part 1' }

UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT

79-006

106TH CONGRESS

REPT. 106-771

HOUSE OF REPRESENTATIVES

2d Session

Part 1
UNLAWFUL INTERNET GAMBLING FUNDING PROHIBITION ACT

JULY 20, 2000- Ordered to be printed
Mr. LEACH, from the Committee on Banking and Financial Services, submitted the following
R E P O R T
[To accompany H.R. 4419]
[Including cost estimate of the Congressional Budget Office]

SECTION 1. SHORT TITLE.

SEC. 2. FINDINGS.

SEC. 3. PROHIBITION ON ACCEPTANCE OF ANY BANK INSTRUMENT FOR UNLAWFUL INTERNET GAMBLING.

SEC. 4. INTERNET GAMBLING IN OR THROUGH FOREIGN JURISDICTIONS.

SEC. 5. ENFORCEMENT ACTIONS.

A bill to prevent the use of certain bank instruments for unlawful Internet gambling.

BACKGROUND AND NEED FOR LEGISLATION

In recent years, gambling activities have proliferated over the Internet. Over 850 sites of offer real-time live gambling over the Internet, and it is estimated that in 1999, Internet gambling revenue reached $1.2 billion. In testimony before the Committee, the Department of Justice reported that the Internet and other new technologies have made possible types of gambling that were not feasible a few years ago. For example, a U.S. citizen can now log on from his living room and participate in an interactive Internet poker game operated from a computer located in Antigua.

The Internet manifests new challenges to designing balanced public policy for gambling activities. Broad public policy concerns with respect to Internet gambling include the absence of regulation, accessibility by minors, and susceptibility to criminal activity.

ABSENCE OF REGULATION

State law has largely shaped legalized gambling in this country. However, there is no regulatory infrastructure for Internet gambling as there is for traditional gambling activities. The nature of the Internet allows gambling sites to escape protections imposed by State gaming commissions on gambling business such as registration and licensing of gaming operations, inspection of gaming equipment, and strict accounting standards.

In this regard, the National Gambling Impact Study Commission (the `Commission') Report, released in June 1999, stated that because Internet gambling crosses state lines, it is difficult for states to adequately monitor and regulate such gambling. The Commission examined the possibility of regulating on-line gambling activities using today's casino regulation as a model. However, the Commission rejected this approach due to technical and legal questions. Thus, the Commission recommended that the federal government prohibit, without new or expanded exemptions, Internet gambling and develop appropriate gambling enforcement strategies.

Similarly, in testimony before the Committee, the National Association of Attorneys General (`NAAG') stated that Internet gambling is one of the few instances where the states have actively promoted and supported the adoption of Federal law to combat such an issue. NAAG stated that `the somewhat unique nature of our support reflects the importance of federal legislation to aid the states' general efforts to control gambling activity that occurs within our borders.'

ACCESSIBILITY BY MINORS

Protections under state gambling laws encompass the goal of providing gambling in a controlled environment, which among other things prevents gambling by minors. In discord with this goal, the Internet defies time and place restrictions by offering gambling at home at any hour, with little insurance against accessibility by minors. The Commission reports that most sites rely on the registrant to disclose his or her correct age and makes little or no effort to verify the accuracy of the information.

The National Collegiate Athletic Association's testimony before the Committee stated that the emergence of Internet gambling enables students to wager behind closed doors in virtual anonymity, which provides a multitude of new opportunities for young people to gamble on college sports. NCAA institutions note that the growing consensus of research that reveals rates of pathological and problem gambling among college students that are three times higher than the adult population.

SUSCEPTIBILITY TO CRIMINAL ACTIVITY

The dual protection of anonymity and encryption provided by the Internet raises a host of issues regarding criminal activities. The National Gambling Impact Study Commission Report states that problems associated with Internet gambling include: 1) the potential for abuse by gambling operators who can alter, move, or entirely remove sites within minutes; 2) the ability of computer hackers or gambling operators to tamper with gambling software to manipulate games to their benefit; and 3) the provision of an additional means for individuals to launder money.

PURPOSE AND SUMMARY

The purpose of this legislation is to make it unlawful for a gambling business to accept a bank instrument in connection with unlawful Internet gambling. In addition, H.R. 4419 provides that, in deliberations between the U.S. and any other country on money laundering, corruption, and crime issues, the U.S. should advance policies that promote the cooperation of foreign governments in the enforcement of this legislation.

HEARINGS

On June 20, 2000, the full Committee held a hearing to hear testimony on the legislation. Testifying at the hearing were: The Honorable Ernest L. Fletcher; Gregory A. Baer, Assistant Secretary for Financial Institutions, Department of the Treasury; Kevin V. Di Gregory, Deputy Assistant Attorney General, Crime Division, Department of Justice; Alan Kesner, Assistant Attorney General, Wisconsin Department of Justice, on behalf of the National Association of Attorneys General; Richard Leone, President, The Century Foundation, and former Commissioner on the National Gambling Impact Study Commission; Daniel Nestel, Assistant Director of Federal Relations, The National Collegiate Athletic Association; Alexander Ingle, Chief Financial Officer, New York Racing Association, Inc.

COMMITTEE CONSIDERATION AND VOTES

(RULE XI, CLAUSE 2(L)(2)(B))

On June 28, 2000, the Committee met in open session to mark up H.R. 4419, the `Internet Gambling Funding Prohibition Act.' During the markup, the Committee approved, by voice vote, two amendments to H.R. 4419. With a quorum being present, a motion to adopt and favorably report H.R. 4419, as amended, to the House was approved by voice vote.

COMMITTEE OVERSIGHT FINDINGS

In compliance with clause 3(c)(1) of rule XIII of the Rules of the House of Representatives, the Committee reports that the findings and recommendations of the Committee, based on oversight activities under clause 2(b)(1) of rule X of the Rules of the House of Representatives, are incorporated in the descriptive portions of this report.

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT FINDINGS

As provided for in clause 3(c)(4) of rule XIII of the Rules of the House of Representatives, no oversight findings have been submitted to the Committee by the Committee on Government Reform.

CONSTITUTIONAL AUTHORITY

In compliance with clause 3(d)(1) of rule XIII of the Rules of the House of Representatives, the Constitutional Authority of Congress to enact this legislation is derived from Article I, section 8, clause 1 (relating to the general welfare of the United States): Article I, section 8, clause 3 (relating to Congressional power to regulate commerce); Article I, section 8, clause 5 (relating to the power `to coin money' and `regulate the value thereof'); and Article I, section 8, clause 18 (relating to making all laws necessary and proper for carrying into execution powers vested by the Constitution in the government of the United States).

NEW BUDGET AUTHORITY AND TAX EXPENDITURES

Clause 3(c)(2) of rule XIII of the Rules of the House of Representatives is inapplicable because this legislation does not provide new budgetary authority or increased tax expenditures.

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the Federal Advisory Committee Act were created by this legislation.

CONGRESSIONAL ACCOUNTABILITY ACT

The reporting requirement under section 102(b)(3) of the Congressional Accountability Act (P.L. 104-1) is inapplicable because this legislation does not relate to terms and conditions of employment or access to public services or accommodations.

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE AND UNFUNDED MANDATES ANALYSIS

The cost estimate pursuant to clause 3(c)(3) of rule XIII of the Rules of the House of Representatives and section 402 of the Congressional Budget Act of 1974 is attached herewith:

U.S. Congress,

Congressional Budget Office,

Washington, DC, July 17, 2000.

Hon. JAMES A. LEACH,
Chairman, Committee on Banking and Financial Services, House of Representatives, Washington, DC.

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4419, the Internet Gambling Funding Prohibition Act.

If you wish further details on this estimate, we will be pleased to provide them. The CBO staff contact is Mark Hadley.

Sincerely,

Barry B. Anderson

(For Dan L. Crippen, Director).

Enclosure.

CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

H.R. 4419--Internet Gambling Funding Prohibition Act

Summary: H.R. 4419 would prohibit gambling businesses from accepting credit cards and other bank instruments from gamblers who illegally bet over the Internet. The bill also would authorize the agencies that regulate insured depository institutions to issue cease-and-desist orders against institutions that knowingly facilitate Internet gambling. The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS), and the National Credit Union Administration (NCUA) would enforce the provisions of H.R. 4419 as they apply to financial institutions.

CBO estimates that implementing this legislation would result in no significant cost to the federal government. Because enactment of H.R. 4419 could affect spending and receipts, pay-as-you-go procedures would apply to the bill. However, CBO estimates that any impact on direct spending and receipts would not be significant.

Although H.R. 4419 would prohibit gambling businesses from accepting credit card payments and other bank instruments from gamblers who bet illegally over the Internet, the bill would not create a new intergovernmental or private-sector mandate. Under current federal and state law, gambling businesses are generally prohibited from accepting bets or wagers over the Internet. Thus, H.R. 4419 does not contain a new mandate relative to current law.

Estimated cost to the Federal Government: CBO estimates that the government would incur no significant costs to implement H.R. 4419.

Basis of estimate

CBO estimates that implementing H.R. 4419 would increase administrative costs of the Department of Justice and the NCUA, but any such costs would be negligible. The bill also would have a small effect on the operating costs of the FDIC and the Federal Reserve System. Finally, the bill would have a negligible effect on the collection and spending of criminal penalties.

Spending subject to appropriation

Because H.R. 4419 would establish a new federal crime relating to Internet gambling, the federal government would be able to pursue cases that it otherwise would not be able to prosecute. CBO expects, however, that most cases would be pursued under state law. Therefore, we estimate that any increase in federal costs for law enforcement, court proceedings, or prison operations would not be significant. Any such additional costs would be subject to the availability of appropriated funds.

H.R. 4419 would require the Department of Justice to submit an annual report on deliberations with other countries on issues related to Internet gambling. CBO estimates that preparing and completing the report would cost less than $100,000 a year, subject to the availability of appropriated funds.

Because we expect few cease-and-desist orders would be issued. CBO estimates that implementing H.R. 4419 would increase the costs of the NCUA by less than $200,000 a year over the 2001-2005 period.

Direct spending and revenues

Both the OTS and the OCC charge fees to cover all their administrative costs; therefore, any additional spending by these agencies to implement the bill would have no net budgetary effect. That is not the case with the FEC, however, which uses deposit insurance premiums paid by all banks to cover the expenses it incurs to supervise state-chartered banks.

The bill would cause a small increase in FDIC spending, but would not affect its premium income. In total, CBO estimates that H.R. 4419 would increase direct spending and offsetting receipts of the OTS, OCC, and FCC by less than $500,000 a year over the 2001-2005 period. Budgetary effects on the Federal Reserve are recorded as changes in revenues (governmental receipts). Based on information from the Federal Reserve, CBO estimates that enacting H.R. 4419 would reduce such revenues by less than $500,000 a year over the 2001-2005 period.

Because those prosecuted and convicted under the bill could be subject to criminal fines, the federal government might collect additional fines if the bill is enacted. Collections of such fines are recorded in the budget as government receipts (i.e., revenues), which are deposited in the Crime Victims Fund and spent in subsequent years. Any additional collections are likely to be negligible because of the small number of cases involved. Because any increase in direct spending would equal the amount of fines collected (with a lag of one year or more), the additional direct spending also would be negligible.

Pay-as-you-go considerations: The Balance Budget and Emergency Deficit Control Act sets up pay-as-you-go procedures for legislation affecting direct spending or receipts. Enacting H.R. 4419 could affect both direct spending and receipts, but CBO estimates that any such effects would be negligible.

Intergovernmental and private-sector impact: Although H.R. 4419 would prohibit gambling businesses from accepting credit card payments and other bank instruments from gamblers who bet illegally over the Internet, the bill would not create a new intergovernmental mandate. Under current federal and state law, gambling businesses are generally prohibited from accepting bets or wagers over the Internet. Thus, H.R. 4419 does not contain a new mandate relative to current law.

H.R. 4419 would authorize federal banking regulators to require depository institutions that have knowingly participated in transactions with unlawful Internet gambling businesses to cease doing so. This provision would not create a new private-sector mandate for depository institutions because federal banking regulators already have such powers under current law.

Previous CBO estimate: CBO estimated the costs of two other bills related to Internet gambling. On May 1, 2000, CBO transmitted a cost estimate for H.R. 3125, the Internet Gambling Prohibition Act of 2000, as ordered reported by the House Committee on the Judiciary on April 6, 2000. On July 15, 1999, CBO transmitted a cost estimate for S. 692, the Internet Gambling Prohibition Act of 1999, as reported by the Senate Committee on the Judiciary on June 17, 1999. Both bills would prohibit gambling conducted over the Internet, and neither bill would result in any significant cost to the federal government.

Estimate prepared by: Federal costs: Mark Hadley; revenues: Carolyn Lynch; impact on State, local, and tribal governments: Shelley Finlayson; and impact on the private sector: John Harris.

Estimate approved by: Robert A. Sunshine, Assistant Director for Budget Analysis.

SECTION-BY-SECTION ANALYSIS

Section 1. Short title

This Act may be cited as the `Unlawful Internet Gambling Funding Prohibition Act.'

Section 2. Findings

Congressional findings include: (1) the role that Internet gambling funded through the use of bank instruments plays in the creation of ultimately uncollectible personal debt, and (2) the susceptibility of Internet gambling to abuse by money launderers.

Section 3. Prohibition on acceptance of any bank instrument for Internet gambling

This section prohibits a gambling business from accepting bank instruments in connection with unlawful Internet gambling. Covered instruments include credit cards, electronic fund transfers, and checks.

Subsection (b) defines the term `bets or wagers' a the staking or risking by any person of something of value upon the outcome of a contest of others, a sporting event, or a game predominantly subject to chance with the agreement that the winner will receive something of greater value than the amount staked or risked. This subsection clarifies that `bets or wagers' does not include a bona fide business transaction governed by the securities laws; a transaction subject to the Commodities Exchange Act; an over-the- counter derivatives instrument; a contract of indemnity or guarantee; an contract for life, health, or accident insurance; or certain participation in a simulation sports game of education game.

Subsection(b) also defines the terms `gambling business, ' `Internet, ' and `unlawful Internet gambling.'

Subsection (c) authorizes civil remedies, including a preliminary injunction or injunction against any person to prevent or restrain a violation of this Act.

Subsection (d) authorizes criminal penalties, including fines or imprisonment for not more than five years or both.

Subsection (e) provides that a financial intermediary(creditor, credit card issues, financial institution, operator of a terminal a which an electronic fund transfer may be initiated, money transmitting business, or national, regional, or local network) shall not be liable for the involvement of a financial intermediary or the use of the facilities of the financial intermediary in connection with a transaction under this Act. However, the subsection specifies that the safe harbor does not apply to a financial intermediary that engaged in a transaction as an agent of a gamble business knowing that the transaction is in violation of this Act.

The purpose of subsection (e) is to ensure that a financial intermediary is not held liable for a violation of this Act solely based on the unknowing and unintentional involvement of the intermediary through the use of the facilities of such intermediary in an unlawful Internet gamble transaction, unless the intermediary acted as an agent of a gambling business and had: (1) actual knowledge that the specific transaction is an unlawful Internet gambling transaction; and (2) the intent to engage in the business of submitting into the payment system Internet Gambling transactions prohibited by this Act.

Section 4. Internet gambling in or through foreign jurisdictions

Section 4 provides that, in deliberations between the U.S. Government any other country on money laundering, corruption, and crime issues, the U.S. Government should encourage cooperation by foreign governments in identifying whether Internet gambling operations are being used for money laundering, corruption, or other crimes, advance policies that promote the cooperation by foreign governments in the enforcement of this Act; and encourage the Financial Action Task Force on Money Laundering to study the extent to which Internet gambling operations are being used for money laundering.

Section 5. Enforcement actions

This section provides that a Federal banking agency may take appropriate enforcement action against an institution that knowingly permitted its payment or credit facilities to be used in connection with Internet gambling activity that violates this Act.

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

SECTION 8 OF THE FEDERAL DEPOSIT INSURANCE ACT

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