Senator Kyl, members of the subcommittee, my name is Sue Schneider. I am chairman of the Interactive Gaming Council ("IGC"). The IGC is the international trade association representing interactive gaming operators, suppliers, publishers, and consumers.

A ONE-SIDED LEGISLATIVE PROCESS

I am sorry that I cannot present oral testimony today. Unfortunately, we were informed that Senator Kyl did not wish to have witnesses whose views differed from his own. As chairman of the subcommittee, it is Mr. Kyl's prerogative, to structure hearings as he wishes, even if the ultimate goal is a "sham" hearing, instead of one that actually gathers facts, hears divergent views, and develops the best possible public policy for America.

It comes as no surprise that this morning's hearing is packed with witnesses calling for prohibition rather than regulation of internet wagering. When Senator Kyl first brought the issue of internet gaming to the forefront in 1997, he held a hearing similar to this one. At that time, the only witnesses permitted were those representing NAAG, the NCAA, the National Football League and other anti-gaming groups that helped Mr. Kyl draft his legislation. Many of the same participants will present testimony today. It is no coincidence that all of them, without exception, will call for a ban on interactive wagering.

Reasonable voices that have put forth alternatives to a complete prohibition are nowhere to be found today. Experts like Dr. Tom Bell of Chapman University or Frank Miller, former chairman of the North American Gaming Regulators Association, are not here to testify, nor are representatives of the United States Justice Department, which last year said that Senator Kyl's legislation was overbroad, unenforceable, and poor internet policy.

As the National Gambling Impact Study Commission has found, reasonable and scholarly minds differ on the best way to approach this issue. Given his track record, however, our being gagged by the junior Senator from Arizona comes as no surprise. For the record, we believe it is neither appropriate, nor fair, nor conducive to sound public policy to have a one-sided debate such as that which is taking place this morning.

SUBSTANCE: SENATOR KYL'S APPROACH IS SHORT-SIGHTED

As many know, the internet was developed by the Pentagon as a means of communicating in the event of a nuclear war or other national emergency. It was designed specifically to circumvent blockages by sending multiple copies of electronic data in multiple packets via multiple routes. Given the world wide web's infrastructure, the mere declaration of an activity as "illegal" will have little impact on the ability of consumers to access web sites offering such activity unless it is enforced in conjunction with broad law enforcement powers such as search warrants, sting operations, roving wiretaps, and other tactics that raise questions of privacy.

When a society decides that it is in its best interests to infringe upon individuals' privacy, a prohibition can be enforced. Such intrusion is warranted to prevent the harm that comes to children and our society from detestable activities like child pornography. We do not, however, believe that similar harm comes from purchasing a lottery ticket online.

Only when an activity is universally abhorred can an entire category of content be proscribed on the internet. If the entire community of nations decides that certain content should be banned (e.g., child pornography), such a prohibition might be effective. Since nearly 15% of the world's nations permit and host some form of interactive wagering online, it is unreasonable to believe that a unilateral declaration by a single nation - even the United States - will be enough to generate worldwide opposition to internet gaming. (note 2)

Because access to internet gaming sites cannot be effectively prohibited, the only true means of dealing with this form of entertainment is to regulate it. The National Gambling Impact Study Commission has heard numerous witnesses from across the ideological spectrum. Every witness who was selected for his understanding of technology and how the internet works, as well as some former law enforcement officers, concluded that regulation is a better means of controlling and safeguarding this activity than the complete prohibition proposed by Senator Kyl last year. All of the witnesses - including those representing the National Association of Attorneys General and its members - have admitted that prohibition cannot stop people from gambling online.

As Wisconsin Deputy Attorney General Alan Kessner has stated on numerous occasions: "What we have is the choice between imperfect regulation and imperfect prohibition." Like Las Vegas in the 1950's, regulation will evolve with technology and time; however, prohibition does nothing more than freeze American regulators out of the process. While imperfect prohibition may be an adequate solution in the short term, no one doubts that regulation is the answer for those thinking past the 2000 elections.

THERE ARE VALID CONCERNS ABOUT INTERACTIVE WAGERING

Senator Kyl has, perhaps inadvertently, done the country a service by highlighting some of the concerns about interactive wagering. Issues such as problem and pathological gambling, minors on the internet, fairness and integrity of games, and taxation must be addressed. The Interactive Gaming Council agrees with Senator Kyl on one thing: open and unregulated gambling on the internet is unacceptable.

Where we diverge is the path that best protects consumers. Senator Kyl stands on the proposition that no form of regulation is sufficient. The IGC, however, believes that regulation, whether by individual states or sovereign foreign governments, is the best way to address consumer protection.

Problem and Pathological Gambling

Last week, the National Gambling Impact Study Commission released a report it commissioned on problem and pathological gambling . The study, conducted by the University of Chicago's National Opinion Research Center ("NORC") found that while problem and pathological gambling is a significant issue, it is not at the epidemic proportions that Senator Kyl and others have claimed. Even more surprising, problem gambling among minors was found to be far less significant than previously thought.

Regardless of the good news contained in the NORC study, easy access to internet gaming sites, whether legal or not, makes problem gambling a major concern for operators and regulators alike. However, computer-driven technology provides the means for identifying patterns of behavior that point to pathological and problem gambling, and thus, allows intervention when appropriate.

In some Australian states where regulation of internet gaming is coming online, consumers have the option of setting limits on gaming activities, ranging from loss limits and cooling off periods to total exclusion from gaming web sites. In contrast, few land-based gaming environments allow for the self-limitation or exclusion from casinos.

The Interactive Gaming Council is also taking significant steps to address compulsion. The IGC's "Helping Hand Campaign" works with operators to provide web links to Gamblers Anonymous and other sites for those who need assistance. And the Council is now working on a database to address problem gaming. Regulation can make these activities mandatory and extend them to non-IGC members. However, prohibition removes any incentive for the industry as a whole to take action to protect consumers.

Underage Gambling

As a justification for his radical approach to internet issues, Senator Kyl often uses the imagery of a child "borrowing the family credit card and gambling away the mortgage." Anyone who understands modern financial markets realizes that the Kyl scenario is just not possible. A child's use of a stolen credit card to gamble is a non-event. The credit card owner is not responsible for such charges. Moreover, children are not liable for gambling debts. The only loser when a minor gambles online is the casino operator, who must refund any proceeds to the bank, and often pay a penalty for accepting the transaction in the first place.

Clearly, it is inappropriate for children to be allowed to gamble. Because operators pay a price for charge-backs when stolen credit cards are used by children, they have every incentive to screen out minors and verify the identities of their customers. Data cross checks, age verification software, and other means are used by online casinos to keep children away. To imply that the online industry encourages children to place wagers is either incredibly or intentionally ignorant of the facts.

In point of fact, there are numerous controls that prevent children (not to mention problem gamblers) from partaking in on-line wagers. Unlike the anonymity of land casinos, lotteries and other forms of wagering in Arizona and most other states, on-line gambling requires a high degree of identification by the player from the moment he decides to play. He or she must have a computer, as well as a credit card. To receive payouts, names and addresses must be supplied; this alone makes it difficult for underage gamblers to go undetected by their parents. Can the activity occur anyway? Of course, like all activities involving teenagers, when there is a will there is a way. But this is far from the epidemic problem raised by Senator Kyl and others. It is more likely a convenient stalking horse desired for its political appeal, rather than its merit.

Fairness of Games

The technology behind internet sites differs little from that of video lottery terminals, video poker, or even the electronic tote boards used by the pari-mutuel industry. All forms of internet wagering can and should be audited for fairness and game integrity, so long as there is a regulator willing to do so.

Taxation

The interactive gaming industry has the potential to generate millions of dollars in tax revenues for federal and/or state governments. Australia's "National Regulatory Framework for Home Gambling" provides for a mechanism whereby states share in the proceeds generated by interactive gaming operators. In one Australian state, the regulatory body levies a 50% tax on casinos, whether land-based or on the internet. While a 50% rate seems excessive, a reasonable level of taxation could provide a steady stream of resources for governments at all levels. Proceeds from such taxes could go toward helping problem gamblers, repairing a badly-broken educational system, or putting more police on the street to prevent real crimes that have real victims.

However, taxation only works with regulation. In the case of prohibition, these potential resources escheat to non-U.S. jurisdictions.

THE IGC REGULATORY MODEL

At a hearing last month before the National Gambling Impact Study Commission, the Interactive Gaming Council announced its support of a legislative framework that provides for state regulation of interactive gaming, respect for states' rights, and taxation. However, it is not a model for so-called "self-regulation." It is the objective of the IGC to encourage rigorous, governmental regulation. A summary of this framework is attached.

If Senator Kyl is truly concerned about children, problem gamblers, and controlling interactive wagering, he will hold hearings on regulation of the industry and use the IGC's proposal as a starting point.

But by attempting to stifle those who have innovative ideas about how to deal with gaming in the 21st century, Senator Kyl does a disservice to himself, the Congress, and those American consumers who chose online gaming as a legitimate form of entertainment.

1) See, Letter from Acting Assistant Attorney General L. Anthony Sutin to Senator Patrick Leahy, May 28, 1998 (attached).

2) It is interesting to note that at least one form of interactive wagering has been in place for nearly 25 years. Account-based phone wagering has been legal in New York and Pennsylvania since the late 1970's. It has been legal for non-Pennsylvanians to use the telephone to place bets at Pennsylvania tracks using account wagering since 1993. And under the Interstate Horse Racing Act, a number of states have permitted in-home wagering via cable television technology. These forms of remote betting present precisely the same type of issues as internet gaming. Yet, in a quarter century of activity, there have been few incidents involving minors, problem gamblers, or lapses of integrity.

3) See, http://www.norc.uchicago.edu/new/gambling.htm

4) In fact, the National Council on Problem Gambling has commended the IGC for its efforts to provide information to consumers about gambling addiction.

5) The NORC research is inconclusive as to the seriousness of youth gambling. However, "[I]f we use adult guidelines standards to gauge the sheer financial riskiness [sic] of youthful wagers, we would have to conclude that adolescent gambling is not nearly as serious a problem as adult gambling." NORC Study, p. 59.