Frank J. Fahrenkopf, Jr.
Thank you Chair Bono Mack, Ranking Member Butterfield and the subcommittee members for the opportunity to provide testimony on behalf of the American Gaming Association (AGA). Allow me a brief introduction of our organization. The AGA represents the commercial casino-entertainment industry by addressing federal legislative and regulatory issues affecting its members, their employees and customers, including federal taxation, online poker, and travel and tourism matters.
The AGA also serves as the industry's national gaming information clearinghouse, providing the media, elected officials, other decision makers and the public with timely, accurate gaming industry data. Commercial casinos operate in 22 states, but there is legal gaming in 48 of the 50 states and the District of Columbia.
Our member companies have committed more than $22 million to the National Center for Responsible Gaming (NCRG), the AGA’s affiliated charity. The NCRG is the only national organization exclusively devoted to funding research that helps increase understanding of pathological and youth gambling, and finding effective methods of treatment for the disorder.
From an economic standpoint, commercial casino companies directly employ nearly 400,000 men and women at 566 properties and are responsible for an additional 475,000 jobs across the country through the additional economic activity they generate.
In fact, the commercial casino industry accounted for about $114 billion in consumer spending last year, which is nearly one percent of the entire $14.5 trillion U.S. Gross Domestic Product.
Some might be surprised to learn that of the $49.5 billion in commercial casino revenues generated last year, one-third – $15.2 billion – came from nongaming sources such as food and beverage sales, hotel revenues and other activities, including entertainment, shopping and conventions.
It is also important to understand the commercial casino industry pays a gaming-specific tax of $7.6 billion to state and local governments, which computes to $9,000 per year for every job it supports in the economy. So, as you can see, our industry is squarely in the mainstream of the U.S. economy, growing more rapidly over the last two decades than any other segment of the recreation industry. We have achieved this by responding to the demands of our customers, which brings us to the subject of the hearing for which this testimony has been prepared.
The answer to the question posed in the title of today’s hearing – “Is There a Safe Bet?”– is a clear yes. That safe bet can be found in the licensing and regulation of online poker. The risky bet would be to leave unchanged current law that leaves consumers, minors and those with gambling problems vulnerable to unregulated offshore companies.
As you may know, the AGA has not always taken this position. For much of the time since Internet gambling was first introduced, the AGA urged caution as the country considered the legalization of Internet gambling.
We simply were not convinced that Internet gambling could be regulated to protect Americans against fraud, money laundering and other illegal activities. We also were concerned that Internet gambling companies wouldn’t be able to prevent minors from gambling on their sites and that there weren’t sufficient safeguards to protect problem gamblers.
New technology and new processes have changed that. We live in a digital world where people can purchase everything from groceries to automobiles online. These e-commerce companies have developed new technology and processes to help them facilitate sales, protect customers and, in some cases, prevent minors from purchasing their products. The same types of technological and process advancements are being used in countries such as Great Britain, France, and Italy and in provinces of Canada to effectively regulate and oversee Internet gambling. Those countries and others have proven that the technology and processes exist to effectively eliminate the risks that contributed to the passage of the Unlawful Internet Gaming Enforcement Act (UIGEA).
Because of the technological and process advancements now available to the gaming industry, we now support the right of states to license online poker, should they choose to do so, through the passage of legislation that would strengthen and enhance UIGEA and provide a strong regulatory framework for states to follow.
You might ask, “Why just online poker?” Poker is substantially different than other forms of gaming. First, it is a game that vast numbers of Americans have historically played and that millions of Americans still play. In fact, the jargon of poker is woven throughout our language with phrases such as blue chip, pass the buck, high roller, wild card, poker face and up the ante.
Second, unlike other forms of Internet gambling, poker is primarily a game of skill. And, poker is played between or among individuals, whereas in other forms of Internet gambling the customer is playing against the “house.” Finally, the support we’ve seen around the country is really focused on online poker and not on other forms of Internet gambling.
The fact is practically every adult in the country has played poker at one time or another, and today the preferred venue for millions of poker players is the Internet.
Last year, in the United States, an estimated 10 million to 15 million people bet billions of dollars online, even though it is illegal for companies to offer real-money Internet gambling in the U.S. Americans will continue to bet online as long as there are sites they can access, and we can expect that there will always be sites they can access as long as there are billions of dollars to be made.
While we applaud the efforts of law enforcement agencies to crack down on illegal off shore gambling sites, they can only make temporary gains. For example, following enactment of the UIGEA in 2006, several major offshore operators stopped taking bets from U.S. residents, and for a period of time the volume of online betting from the U.S. decreased.
Yet the market recovered with new sites coming online, and in 2010, Internet gambling revenues from U.S. bettors exceeded $4 billion.
Even the indictments of executives from several online poker companies last April did not stop Internet gambling. In fact, in the immediate aftermath of online poker’s “Black Friday,” the companies that continue to operate in the U.S. saw a surge in new business. Shortly after that event, it was estimated there were still more than 1,000 real-money websites operated by nearly 300 offshore operators targeting the U.S. market. This is further proof that offshore operators will continue to cater to demand and develop new techniques to circumvent the barriers we put in place. The volume may fluctuate with each closed website and set of indictments, but demand will prevail in the end.
Moreover, it is very likely that Internet gambling operators who fill this void will be even less regulated and less trustworthy than their predecessors, which will only hurt American consumers.
Put simply, the current environment puts American online players at risk. It is practically impossible to ensure that children are not gambling online and that the Internet gambling companies are acting responsibly towards those who cannot gamble responsibly. These companies, by illegally operating in the U.S., are flouting our laws; they are doing it where law enforcement cannot reach them and where, in many cases, there is little to no regulatory oversight.
One dramatic example of the risks faced by U.S. consumers in this environment can be found in the indictment of key figures at Full Tilt Poker, one of the most popular and prominent Internet gambling sites. Calling the operation a “Ponzi” scheme, the federal government alleged that several executives at Full Tilt Poker defrauded unwitting online gamblers of hundreds of millions of dollars.
Consumers could be saved from this risk if UIGEA were strengthened so states that wanted to could license and regulate online poker, following federal guidelines. We know U.S.-licensed gaming companies, following time-tested gaming regulations, would provide safe, honest, responsible sites for the use of the men and women who want to play online poker. A strengthened UIGEA also would protect Americans from unscrupulous operators and would have the added advantage of bringing the jobs and revenues associated with this billion-dollar industry back to the United States.
The creation of the infrastructure to support a licensed and regulated online poker industry would create an estimated 10,000 high-tech jobs – jobs that our country desperately needs right now. In addition, once a well-designed system is in place, the legalization of online poker would generate $2 billion in tax revenue, primarily at the state level, every year. That’s money that would go back into American communities to help fund schools, fix roads and provide medical care.
To realize these benefits will require action by Congress, beginning with this committee. The AGA does not support any specific legislation, but there are certain provisions that any change should include:
- Each state should have the right to determine whether online poker should be legalized within their jurisdictions.
- Federal guidelines should be established that the states must follow to ensure a consistent regulatory and legal framework.
- U.S. law enforcement should be provided with the ability to go after illegal operators and successfully prosecute them.
In addition, online poker companies licensed in the U.S. should adhere to the same stringent level of regulation that governs brick-and-mortar casinos in this country. Our companies have a strong history of regulatory compliance. In fact, we welcome tough regulation, because we know it is essential to our ability to operate. The regulations we follow are time-proven and if online poker companies are required to comply with them it would ensure American consumers are playing in a fair and secure environment provided by a responsible operator.
The AGA introduced a Code of Conduct for U.S. Licensed Online Poker Companies that incorporates the key elements of the successful regulations followed by U.S. casinos. To be licensed, companies should agree to:
- Submit to extensive background investigations of the company and key personnel
- Ensure proper ID of every U.S. online poker player
- Submit to regular testing and auditing of online poker software
- Implement effective player exclusion processes
- Incorporate effective responsible gaming protections
- Implement effective anti-money-laundering procedures
Legislation that incorporates the provisions above and the elements of the Code of Conduct would effectively protect U.S. consumers and state licensing and regulation would eliminate illegal websites operated by offshore companies. But, without the technology and processes available today such a law would probably be impossible to enforce.
Fortunately, new technology and processes can, in fact, address those concerns. This can be accomplished in four ways:
- A rigorous registration process;
- Technology-assisted fraud and collusion monitoring;
- Anti-money-laundering technology and processes; and,
- Promotion of responsible gaming by providing players the ability to manage their game play in real time.
Let’s take a look at these safeguards.
Most people are familiar with registering for online services. Registering to play poker online is much more extensive and thorough. For example, the online poker company would be able to, with almost 100 percent certainty, instantly determine the potential player’s age and confirm his or her identity. Registration processes and advanced technology very similar to those used by companies such as Major League Baseball, CBS and Apple also would allow the online poker company to:
- determine where the player is located,
- determine whether the Social Security number used is valid and is actually the player’s own, which would prevent underage gambling, and
- find out if the player has any sanctions by state, federal or international governments.
One example of the advanced techniques available is biometric confirmation. Biometric confirmation – also known as voice or facial recognition – could be required of everyone registering to play online. This would prevent a minor from using a parent’s or other adult’s sign-in information or credit card as he or she would be unable to pass the biometric confirmation test.
Preventing cheating, whether by humans or software programs, is made easy through the use of fraud and collusion monitoring technology, coupled with reporting of suspicious play by other players.
And, efforts to launder money are detected through a number of reports and checks used exclusively by the gaming industry, as well as other processes that are common in financial institutions. Among those processes are spotting unusual deposit and cash-out patterns, and identifying players who frequently play with the same players or frequently lose to the same players. Other safeguards include having processes that don’t allow a person-to-person transfer of funds because operational controls ensure that money deposited with an online poker company would always return to its original source.
Technology also allows players to manage their gambling in real time by doing things such as designating a set amount of money or time they can spend on the site, asking for a cooling off period and, if they feel they have lost control of their gambling, choosing to self-exclude.
With these processes and the technology that supports them in place, patrons could play poker online in a safe, honest place. Law enforcement would be helped by operators’ ability to quickly identify possible fraud and other criminal activities. And, the public could be confident that operators are taking bets only from jurisdictions where it is legal, keeping minors from gambling and providing assistance to problem gamblers.
Eighty-five countries have legalized Internet gambling, and the technology and processes described above are being used in many of them, including Western Europe and Canada, where years of experience are proof positive that the risks formerly thought to be a companion to online poker can be effectively managed.
Before concluding this testimony, I would like to take the opportunity to address in more detail the question of the impact of online poker on problem gambling.
It is settled science that at any given time that about 1 percent of the U.S. adult population are pathological gamblers. Researchers also have found no evidence that Internet gamblers are more likely to be pathological gamblers. In fact, a major British study found no increase in the rate of pathological gambling between 1999 and 2007, even though Internet gambling became widely available during that period. Similar results emerged in a study of Swedish gamblers.
More recently, in a 2010 article in Addiction Research and Theory, Dr. Howard J. Shaffer, director of the Division on Addictions and associate professor of psychiatry at Harvard Medical School, and his colleagues offered a comprehensive look at the research conducted to date, including summaries of their own investigations of the gambling patterns of customers of bwin.party, one of Europe’s largest Internet gambling companies.
Professor Shaffer and his colleagues have pioneered new methods for studying Internet gambling by virtue of their access to the actual wagering transactions of 40,000 online gamblers, including every keystroke of every person who subscribes to the bwin.party website. These data, which reflect actual gambling patterns rather than relying on self-reporting, provide “objective detailed information about betting behavior and the conditions under which gamblers place wagers.”
The analysis of the bwin.party data has produced seven peer-reviewed publications that contradict the notion that Internet gambling breeds excessive and problematic gambling (Broda et al., 2008; LaBrie et al., 2007, 2008; LaPlante et al., 2008, 2009; Nelson et al., 2008; Xuan & Shaffer, 2009). Although the prevalence of pathological gambling is low, and even though there is no evidence that Internet gambling would change that pattern, it is still important that online poker companies should implement responsible gaming programs just as brick-and-mortar casinos do.
By requiring licensed websites to include social responsibility protections, legalization of online poker would actually improve efforts to assist pathological gamblers. Today, without any U.S. regulation, there are no uniform requirements for player protection tools at gambling websites. Indeed, many foreign jurisdictions require no such tools, so gambling operators located in those jurisdictions often do not provide them. For these reasons, the report by Shaffer et al. concluded that “regulators should be able to design sufficient protections to prevent any significant growth in problem gambling that results from legalization.”
In conclusion, the safe bet is to allow states to license and regulate online poker following federal guidelines. Such action would protect U.S. consumers, keep children from gambling on the Internet, and provide the tools law enforcement needs to shut down illegal Internet gambling operators. It would also create new jobs and tax revenue at a time when both are sorely needed.