Hearing of the House Financial Services Committee's Domestic and International Monetary Policy, Trade and Technology Subcommittee: Proposed Regulation to the Unlawful Internet Gambling Enforcement Act (UIGEA)
BREAK IN TRANSCRIPT
REP. BARNEY FRANK (D-MA): Mr. Chairman, the ranking member is correct that I opposed this bill and would like to see it repealed, not the very underlying act that these regulations implement. I think it is an intrusion into personal liberty, motivated by the fact that a majority of members dislike the purposes to which the liberty is being put.
But that does not mean there is no separate issue regarding regulation, and I would urge members on all sides to contemplate the arguments that are being made.
First, as to the attorneys general, let me say that we thought we had preserved states' rights in the bill. We have written to them and told them we would be glad, those of us who sponsored the underlying repeal bill, to make clear that the states have that right.
But beyond that, what they are objecting to is something that I thought many members of this Committee supported, namely, uniform rules on the Internet. So understand the principle that is involved here and the precedents being set, namely, if members of Congress have a moral objection, we can intrude on the freedom of the Internet and we can tell people what they can and cannot do on the Internet.
Now, I had previously understood that to be something that members didn't support, and what states have said, well, we want to be able to collect sales taxes. And I've been for letting the states collect sales taxes through the Internet. I cannot see what the intellectual and principle difference is between saying that the states are wholly in charge of whether or not individuals choose to gamble, but they have no say about whether or not sales tax can be appointed -- levied. So you are setting the precedent of a federalization of the Internet, based on the moral views of members of Congress.
Now, I understand some people abuse gambling. Some people abuse video games. Some people abuse alcohol. Some people abuse a lot of things. The notion that a society prohibits most people from doing something because a small percentage abuse it I had never thought to be the guiding principle.
But then we get to the question of the regulations, and here the argument appears to be that given the importance of the underlying objective, let's not pay any attention to whether the regulations are burdensome or not. Again, that's not a position that I thought many of my conservative friends adhered to.
What we're being told, in effect, is well, forget about whether or not the regulations are burdensome, inefficient. Virtually every sector of the economy affected by these regulations has complained of them. The Federal Reserve, in testimony -- and I appreciate their candor -- says this is a challenging task. The ability and the final will achieve a substantial further reduction is uncertain. Our objective is to craft a rule to implement the Act as effectively as possible in a manner that does not have a substantial adverse effect on the efficiency of the nation's payment system.
This didn't come from gamblers, this came from the Federal Reserve. And are we to say that, given the overriding importance of the moral objection many members have to gambling, that we will therefore go forward with regulations, no matter how much they might intrude on the efficiency of the system? Well, that's not a great precedent to set. It does seem to me it's important to say there is the objective, and then there is a separate question as to the regulations.
Now, I am of the view -- and there are two separate questions here -- that the manner in which the Congress has chosen to outlaw gambling is the wrong one. That is, we have an objection to gambling and we have enlisted the payment system and the banks of America to be our anti-gambling cops to the detriment, I believe, of their ability to carry on their important financial intermediation function.
Maybe it was to try and get it into this Committee. I know the former chairman, the gentleman from Iowa, my predecessor, who is ranking member of -- the gentleman from New York -- they really didn't like gambling. And they wanted our Committee to be the one that drove the stake through its heart.
But I think that was an error. I think it was -- and again, I'm not for banning gambling. I did not come here to tell other people what to do with their leisure time. But even those of you who do feel confident in your ability to supervise the leisure activities of other adults, ought to find a way to do it directly without drafting the financial system of this country and putting it in the service of your moral objections.
And I believe that the difficulties we are seeing in enforcing the regulation are not due to any shortcomings on the part of those doing it. I think the Federal Reserve, the Treasury, they're doing their best. We gave them the wrong job.
Again, if you want to get rid of gambling, find some other way to do it. But don't impose -- and look, the Federal Reserve is not given to hyperbole. When the official statement from the Federal Reserve system is we are trying, quote, "to craft a rule to implement the Act as effectively as possible in a manner that does not have a substantial adverse effect on the efficiency of the payment system," that means that this could very well be an adverse effect. They don't deal with Schumer. So what we're apparently being told is, well a little adverse effect on the payment system is worth it, because we'll feel so much better in stopping people from gambling.
I do disagree with the underlying objective of the Act. But even those who agree with it ought to be willing to say you know what? Let's find a different way to enforce it. Let's not burden the important payment system by doing it this way.
REP. GUTIERREZ: All time has expired on our side. I have a list handed to me by the staffer of the minority, and without objection, I'll follow this. Representative Hensarling of Texas for two minutes; one minute to Representative Davis of Kentucky. And I'd ask for unanimous consent of the members of the Subcommittee to allow Representative King one minute. Without objection --
REP. FRANK: Excuse me, the gentlemen would like to object. You never know when you're going to want something from the governor of New York, so I won't object. (Laughter.)
BREAK IN TRANSCRIPT
REP. FRANK: Well, to begin, we are prepared to use language to exempt the sports league -- we already allow them to. But as I understand it, what they're probably telling you is that they -- as I read the letter that the gentleman wrote, that -- that they want these regulations as proposed adopted. And what they're saying is because there might be some problem with their business, even though they can be exempted, they're insisting that regulations be adopted that all of those on whom they would fall find very burdensome. So their total lack of concern for the payment system -- for the legitimate arguments raised by the others is troubling.
But I'm particularly intrigued by the question of horse racing. And I admit that I am not a Biblical scholar, and I often am unable to follow some of the distinctions that Biblical scholars make. The one I have been trying is in all of the moral teaching about gambling -- you know, I have this problem with regard, for instance, to conservative economics -- free market, free enterprise. I have not yet found the footnote that says, "except agriculture" that many of my conservative colleagues believe deeply. Similarly, I can't find the exemption from horse race -- for horse racing in all of the anti- gambling morality or in the statistics on people being addicted.
But as I understand it, we did get a letter from the gentleman from Kentucky urging that you make clear that we are exempting horse racing, which I -- I thought betting on a horse was gambling. Apparently betting on a horse is not gambling. Perhaps it's animal husbandry, I don't know. (Laughter.) But let me ask you -- because one of the problems we have is uncertainty. And there's really a rather extraordinary provision in this law that says, "Nothing in this bill" -- this is the underlying law that the gentleman from Alabama sponsored -- there's a provision that says, "Nothing in this law will resolve the uncertainty as to whether or not it covers horse racing." Really the -- a rather bizarre piece of legislation. Congress says Congress cannot make up its mind about the conflict.
But let me ask you -- with regard to people who gamble through the Internet on horse racing in states where that is not legal, is that banned or not banned according to the regulation? Let's ask each of you.
MS. ROSEMAN: Well, in our consultations with the Department of Justice, they have -- their belief is that it's illegal in all states irrespective of whether the individual state has banned it or not.
REP. FRANK: Well, does the regulation say that?
MS. ROSEMAN: The regulation itself did not say that because in the proposed regulation, we did not go down the road of trying to resolve the --
REP. FRANK: Well, I'm a bank and I get this processing request for someone who made a bet on a horse race. Do I accept it or do I reject it according the regulation?
MS. ROSEMAN: That is -- that was the biggest comment we got --
REP. FRANK: Well, I understand that, but I didn't ask you how many comments you got. What do I do? I'm a nice little bank here --
MS. ROSEMAN: Mm-hmm.
REP. FRANK: -- and I don't want to -- you know, I said, "Well, look, I" -- you know, "who am I to counteract the great morality of that wonderful Congress that tells everybody how to live a good life? And how do I interfere so now somebody wants to make a bet on a horse? Do I allow that bet to be paid or do I not?" I -- you made the regulation --
REP. DAVIS: I would allow you to do it.
REP. FRANK: Well, I didn't yield --
REP. DAVIS: I'll let you bet.
REP. FRANK: I didn't yield to the gentleman. (Laughter.) And if the gentleman wants to make a clarification, he ought to do it in the law. This law that he passed -- that helped pass -- that says, "We don't know," I guess they're against gambling except if the bank has to gamble.
But I do want to ask the question. Under the regulations as proposed -- they may be amended -- I am a financial institution -- do I or do I not process that payment for a bet on a horse?
MS. ROSEMAN: I would assume that most institutions would not process --
REP. FRANK: No. I don't -- I'm not asking you to assume what they would do. You're the regulator and I understand you didn't write this silly business no, don't take it personally, but you've got this responsibility -- (laughter) -- what -- when the lawyers calls you and says, "Okay, counsel to the Fed, counsel to the Treasury, I have a very law-abiding client here."
MS. ROSEMAN: Mm-hmm.
REP. FRANK: "What should she do? Should she process this payment? Or if she processes the payment, is she violating the law?" What's the answer?
MS. ROSEMAN: Unfortunately, the proposed reg was silent on that issue and I think that's something we're going to need to look at for the final --
REP. FRANK: So the answer is, "Gamble on it."
REP. GUTIERREZ: I don't know.
MS. ROSEMAN: That is essentially what --
REP. FRANK: And our friends at the NFL and the AFL, et cetera, have said -- the NFL and the major leagues -- you go ahead and do it.
So we are telling the entire payment -- the entire financial structure of America that whether or not -- and I would guess that betting on horses is a substantial part of gambling -- I think that is the greatest abdication of responsibility that I can think of, for Congress to foist that set of choices and ambiguities on the system.
Thank you, Mr. Chairman.
BREAK IN TRANSCRIPT
REP. FRANK: Let me just ask, on the -- if I could briefly, on the question of confusion. I've been informed by -- (inaudible) -- the 5th Circuit in 2002 ruled that horse race gambling was legal. So in the interpretation would it make any difference if I were a bank in the 5th Circuit or elsewhere? I know the Justice Department doesn't agree with the 5th Circuit.
REP. BACHUS: Point of order.
REP. GUTIERREZ: Gentleman will state his point of order.
REP. BACHUS: I have no problem with the chairman asking this question. I would also ask for equal time.
REP. FRANK: Well, that wouldn't be a point of order I guess. The gentleman didn't object to my asking the question as long as he didn't think it was a tough question. So I'll withdraw it and ask it later. (Laughter.)
BREAK IN TRANSCRIPT
REP. FRANK: Would the gentleman yield to me for one -- just briefly?
REP. KING: If it's appropriate I would yield.
REP. FRANK: Yes, I have one question based on the line of questioning from my colleague from Texas, Mr. Marchant.
You mentioned that there might be a disguise. They might say it's Joe's T-Shirt Shop, et cetera. There are penalties for the financial institutions there. Under the regulations would a financial institution be under any affirmative obligation to uncover a pattern that might suggest fraud?
MS. ROSEMAN: Under the proposed regulations we just said that the banks that had the customer relationships with the business customers would just have to do due diligence to ensure that those customers were not putting restricted transactions through their bank.
Whether, if there was a pattern that was similar, if the pattern of transactions was something that would not look anomalous in their cover activity I'm not sure if that's something that the bank would necessarily --
REP. FRANK: Okay, but it's important for you not to simply be not sure. We need to know.
BREAK IN TRANSCRIPT
REP. FRANK: I thank -- I just wanted to clarify, when the gentleman from Alabama raised the question of the Justice Department, as chairman of the committee it's generally been our policy to have before us as witnesses representatives from those agencies that come under our jurisdiction. I can't remember a time either recently or in prior years when we have the head of a different agency before us. It becomes a jurisdictional issue.
So I understand the concern here, but I can't remember an attorney general or a representative of the Justice Department ever testifying before us. It's generally the case that committees deal with representatives of the agencies that are under their jurisdiction.
REP. MCHENRY: What about the FTC, Mr. Chairman?
REP. FRANK: We have partial jurisdiction over the FTC statutes. The FTC statutes -- for instance, when we did the privacy act, we gave some duties to the FTC among others. So we -- whereas as members where we could -- whenever a question of increasing the penalty, for instance, comes up, we don't deal with that. We send it to judiciary. So we have assured jurisdiction over the FTC.
REP. GUTIERREZ: I thank the gentleman from Massachusetts, the chairman, for that clarification. Indeed this bill did go for hearings both before this committee and judiciary committee because of the concerns with the Department of Justice. And we expect to call them at Judiciary to take up the issues with the Department of Justice.
Again, Federal Reserve and Treasury clearly are under the jurisdiction of this committee, and that's why they were called forward, as they are bringing all of the comments forward from the public.
I'd like unanimous consent to include in the record comments from the American Greyhound Track Operators Association. Without objection, so ordered.
Would the gentlemen present care for a second round of questions?
REP. FRANK: We'll let the members who weren't here --
BREAK IN TRANSCRIPT
REP. FRANK: If I could just get an answer to the question about whether or not it makes a difference if you're in the 5th Circuit? Because the 5th Circuit did in 2002 give a ruling on the legality of some horse race betting -- I know Justice doesn't agree.
Under the regulations, would it make any difference if I were a financial institution in the 5th Circuit or if the activity happened in the 5th Circuit?
MS. ABEND: Yeah. I -- well, if you're talking about horse racing --
REP. FRANK: Yes.
MS. ABEND: -- in our regulation we did explicitly exclude horse racing permitted under the Interstate Horse Racing Act, as did the act itself. We just did not define --
REP. FRANK: I understand that. But the Justice Department is saying one thing. The 5th Circuit has had a ruling. Does it make any difference -- do I get any protection from the fact that the 5th Circuit has ruled that it is permitted?
MS. ROSEMAN: I would assume if you were in the 5th Circuit, you would have that protection from that court's rulings.
REP. FRANK: If I could have one last question. You said, those contests, you could bet on those contests which were a combination of skill and chance. Would it be legal to bet on elections under this? (Laughter.)
MS. ROSEMAN: You know, we posed that question recently to the Justice Department, because there are these predictive markets websites that you could bet on everything from the outcome of a presidential election to a number of other things. They considered that subject to chance; that was their interpretation.
REP. FRANK: So that's illegal?
MS. ROSEMAN: That is their interpretation.
REP. FRANK: Thank you.
REP. GUTIERREZ: (Off mike.)
REP. PAUL: Right. Mr. Chairman, I ask unanimous consent to submit two letters on behalf of Congressman Bachus.
REP. GUTIERREZ: Without objection, so ordered.
REP. FRANK: I would -- let me just say this. My colleague from Florida raised New Hampshire. I'm at this point prepared to say that the New Hampshire primary is pretty much a game of chance. (Laughter.)
REP. GUTIERREZ: Let me thank the witnesses. As you can tell -- I will tell both Ms. Abend and Roseman that I've chaired about half a dozen of these hearings. I've never had this kind of participation and activity, which says, be careful about where you go with these regulations. I mean, there is a lot of interest. Obviously there is a lot of interest on the part of members of this committee and the members of the House of Representatives. At least if the participation today is any indication, and I think it is an indication.
So we will work with you as we move forward. I just think you've got one hell of a complicated job when, you know, you have major broadcasters saying, Kentucky Derby, everybody knows gentlemen are betting. And for those of you -- I mean there's so much betting going on in America, this is going to be a very difficult challenge for you.
I hope you can outlaw the foursome in front of me on the golf course on those putts -- stopping those putts -- so that I can get through the day a lot quicker.
Thank you so much.
REP. FRANK: Mr. Chairman, I think there are only three votes. We should be back fairly quickly.
REP. GUTIERREZ: We shall adjourn and be right back. Thank you so much.
REP. FRANK: Thank you. The first panel was a lengthy one, but I don't think to the disappointment of any of those who are here with us. Chairman Gutierrez has Judiciary Committee business, and they're voting, so I will start this off. We have our second panel of people from the financial services industry in particular, and we will begin with Harriet May, who's the president and chief executive officer of the GECU of El Paso, and she is speaking on behalf of both the Credit Union National Association. And please tell our former colleague, Mr. Mica -- our good friend -- don't worry about the proposal to abolish the credit unions. We would never do that. So we'll ignore that part of the -- (inaudible) -- don't worry about anything.
Now, you go ahead.
BREAK IN TRANSCRIPT
REP. FRANK: Mr. Kitada, I'm told -- in your comment -- (inaudible) -- you also noted that we can't be sure what entities are covered, that financial institution, as the statute defines it, may sweep more widely than people would ordinarily think. Could you comment on that?
MR. KITADA: With regard to the definition of financial institutions, or to --
REP. FRANK: Of the transmitters of money that --
MR. KITADA: Oh, money transmitters? Yes, under the Act there is a reference to the definition of money transmitters, and in contrast, there is also, under the regulations issued by the Treasury a definition for money service business.
And with regard to money service business, there is a exclusion or safe harbor for check cashers that cash items regularly for under $1,000. And there is no such exclusion under the act. And so consequently, with regard to money transmitters, that population of check cashers who heretofore may have enjoyed a safe harbor under the Bank Secrecy Act will now become subject to this Act, and to the requirements for developing policies and procedures.
And it also raises some challenging questions for the industry in terms of policing the behavior of money transmitters.
REP. FRANK: Well, that's my point. That's my -- can I -- and again, I want to stress we can divide this.
Congress, of course, has the right, I believe, to ban gambling. I don't agree with it. I share the views of my colleague from Texas and others that it ought to be a matter of personal liberty. But there's a second question, even if we decide to do it, as to how to do it.
And in effect what this does, this law, is to draft the financial service industry -- in effect deputize the financial service industry, and turn you into the enforcers of the law. And it seems that we can go at this -- (inaudible). But here's part of the problem.
You have due diligence requirements, et cetera. You have all these customers. What troubles me is, and there is a letter from Grover Norquist on behalf of a coalition of organizations, raising questions about privacy. What I am afraid of is that there is a conflict between the obligation imposed on you by the Act to do due diligence and to see whether or not people are trying to get around this, and the privacy expectations of your customers.
Mr. Abernathy, is that an accurate description of your dilemma?
MR. ABERNATHY: I think that's very accurate. A bank is really in the position of having to make one decision -- cut off all transactions that look in any way that might be heading toward illegal Internet gambling or have to become very intrusive in the kinds of questions we ask so that we can make the decision the Act forces us to make.
REP. FRANK: And one of the things it will do by, as I said, kind of drafting you to be the law enforcement people, we've seen this in other cases. What you can envision is tremendous increase in complaints about the financial institutions to the consumer protection agencies, because the federal government has made you do it. And a lot of consumers who are going to find themselves having their transactions cut off or blocked aren't going to realize that this is something imposed on you by the federal government.
I think the recipe for problems here is just enormous, because you are being put in this position where you have to do this.
So let me ask you all, and Mr. Kitada particularly your counsel; Mr. Abernathy, you advise people. Let me get back to the horse racing question. If I am a bank, do I have to block someone who's made a bet on a horse race and is paying off a bet on a horse race in a state where horse racing A, was legal; B, wasn't legal; C, wasn't legal but is in the Fifth Circuit. I mean -- D, all of the above.
MR. ABERNATHY: I think one of the problems is even though you might know where the race took place, you don't know where the bet is coming from if you're talking about the Internet.
REP. FRANK: And that's the determinant, not where the race took place. So in other words -- okay.
MR. ABERNATHY: You've got two places you have to be worried about. Where did the transaction take place, where did the event take place, where did the person who was doing the activity -- where were they when --
REP. FRANK: And it would have to meet both. And of course, it would never -- because it may never be legal to bet on the -- well, we don't know that. What do you advise your client, then?
MR. ABERNATHY: We would advise them -- we, frankly, as a trade association, can't give them specific advice, but what I suspect they would do is they'd just block the transaction. And that gets back to Mr. Paul's point. We would block a lot more legal transactions in the effort to avoid being tagged for failure to block the illegal one.
REP. FRANK: One of the issues that has been occupying us is the competitive aspect. We've been told that we have to be careful, whether it's -- (inaudible) -- Forbes, Sarbanes, Oxley, or other things, about driving financial business out of America. If we were to adopt tomorrow as the major league sports -- as a major sports league -- if we were promptly to adopt the pending regulations, would that have any effect on the competitive position of American financial institutions in the world?
MR. ABERNATHY: I think the biggest impact would be that it begins to -- well, it begins, it continues to compromise the quality of the payment system. It's not just the banks themselves, but you're now putting a new burden on what is one of the fundamental purposes of the banking system, and that's to make sure payments can be made between parties as quickly, as efficiently, and as low-cost as possible. We've now compromised that.
REP. FRANK: Any others?
MR. WILLIAMS: There are three ways, Mr. Chairman, that we might undermine competitiveness. One is we might be required to increase compliance costs to the point where they would become a threat. We might disrupt customer service, particularly in this over-blocking, to the point where that would become a real issue.
Or we might devote resources from other more critical risk- management activities, and that also could put the industry and the customers at risk.
REP. FRANK: Let me close by saying as the chair of this Committee, and we have some responsibility to try and facilitate the functioning of the financial system -- you know, this is, you're being drafted by the bill -- I think our Committee was drafted, although by its own leadership, to do this.
If our colleagues want to go on an anti-gambling crusade, well, I can't stop them necessarily. But I would hope we could stop them from burdening this Committee and our jurisdiction, the financial services institution, from getting entangled in it.
Thank you, Mr. Chairman.
BREAK IN TRANSCRIPT