NATIONAL GAMBLING IMPACT STUDY COMMISSION

MR. KESNER: Thank you very much, Madam Chairman and Commissioners. My name is Alan Kesner. I'm an Assistant Attorney General with the Wisconsin Attorney General's office, and the Chair of the staff working group with the staff subcommittee on Internet gambling of the National Association of Attorneys General. I've been involved in studying this issue for about three years, since the summer of 1995, when we first formed our staff working group at the National Association of Attorneys General.

Attorney General Doyle of Wisconsin expresses his regrets for not being able to be here himself. He has his own conference hosting a number of law enforcement officials today in Wisconsin.

The Internet is a very difficult issue, as my written testimony will say. The Internet has taken the gambling world by storm. Gambling itself is one of the most heavily regulated industries we know in the world. Of course, as Allison has previously described, the Internet is almost unregulated and perhaps unregulatable, so we've got a clash of cultures here. Regulation in the gambling industry has a lot of important parameters that can't be addressed in the Internet context. In fact, the very qualities that make the Internet the powerful force that it is today are those which go directly against the ability to regulate and effectively control what happens on the Internet.

There are a lot of people trying to solve the Internet's shortcomings in the context of Internet commerce and electronic commerce, but none of these solutions are yet uniformly available across the Internet. Integrating all these necessary components into one set of seamless applications which is available to average consumers in the United States is years away from reality at this point.

Until the time comes that gambling on the Internet can be fairly and effectively regulated, if that ever comes, our public policy should be to prohibit Internet gambling. A public stance of prohibition tells consumers that they have to be extremely wary of what they're dealing with.

The regulatory system that might be put in place on the Internet, that by its very nature would be an ineffective regulatory system, but which would be endorsed by the government would only give a false sense of security to participants. Players would tend believe that the games are fair, are offered by known and trusted parties, there's recourse in the event of disputes and that children and problem gamblers should be kept out. But no regulatory structure currently envisioned in conjunction with currently available technology will assure this to be the case. Our government should not be part of such a charade.

By the way, I'm using terms that aren't familiar. I know Internet is a new issue to all of us. Please feel free, if you want to interrupt me, I'll welcome you, although I'll take questions later as well.

People who would be harmed by an ineffective attempt to regulate Internet gambling are those very people who would trust the ability of regulators to do their jobs. The Internet simply won't allow effective regulation to take place. The Internet was designed, if you'll recall, to allow our nation's and even the world's computer, to communicate with each other in the event of a nuclear war or some other disaster. A few government bureaucrats trying to regulate Internet gambling certainly aren't going to be able to stop the ingenious work-arounds that are built into the core of the Internet system itself.

Gambling regulation is first and foremost a form of consumer protection. It also serves a number of other law enforcement purposes, such as the prevention of theft and money laundering. Issues such as the ability to confirm the identity of players and operators, providing certainly surrounding the manner in which the games are conducted themselves, accountability for financial transactions by both the consumers and the operators, as well as fair dispute resolution procedures are of paramount importance for the effective regulation of gambling.

If it were regulating an activity like Internet gambling, it would be important for the government to take a role in all these manners and many more because of the relatively unequal bargaining positions of the participants. Individual players of gambling games, if pure market forces were allowed to control, would have a relatively weak bargaining position compared to the well financed and security cloaked gambling operators who would ask the consumers to part with their cash.

The operator might perhaps promise a fair game in return, but we have to remember the game would always be tilted in favor of the house and we've heard before that the opulence of Las Vegas' strip was not built on the money of winners.

Another important point here is that the gambling operators themselves would want to be regulated. They see that proposing a regulatory system for their industry will tell you that they need regulation to make their business successful. The government stamp of approval would provide instant credibility and the ability to go ahead with the business of making money. Regulation is, in essence, a regulatory body vouching for the credibility and fairness of the enterprise. That is a fairly large obligation in this, the age of the Internet.

I want to make a few comments regarding some of the specific regulatory issues in gambling in general and how it might apply to the Internet.

The licensing of operators is one of the most important functions of a gambling regulatory agency. Through background investigations of the operators of commercial businesses, we can see past histories of associations which are often a crucial indicator of future performance. Just like in the real world, a government which regulates Internet gambling could perhaps investigate and license its operators; however, there's no uniform system currently available which consumers at the other end could be assured that a government's seal of approval on a website is really what it purports to be or that the operators themselves are what they purport to be.

With the use of dynamic Internet addressing and some of the currently anticipated changes of the Internet, this is going to be even more difficult than it is currently to identify website operators with absolute certainty.

Also as in other non-Internet context, gambling regulatory agencies could test game algorithms which is the code which runs a game on a computer and attempt to verify that those games are fair and honest. However, online games are constantly changing and being updated. They don't have the same static form of game that an electronic gambling machine has. There again is not a uniformly accepted system for players to be able to assure that the game code they are playing is the same game code that was approved by regulators, if indeed it ever was approved.

Once again, players are going to be on their own against an unequal adversary.

Another important function of regulatory agencies is monetary control. An anonymous cash base industry such as the gambling industry sees huge amounts of money coming from players, flowing through the various games and tables and going into the pockets of the operators. Internet gambling will be no different. The mainstream gambling market at this point uses credit and other types of traceable financial transactions that do offer some assurances; however, with the advent of terms such as digital cash and electronic money, it can basically turn into an anonymous cash-like based economy on the Internet and we will see much more push because of the relative desire for anonymity among players and operators themselves.

In fact, players might easily be shortchanged, tax obligations could be avoided, large prize payouts could be avoided by unscrupulous operators who might, as previously stated, disappear from the web overnight. And all the victims' accumulated winnings of course, would go with that operator.

Operators themselves might even be the victims because off shore subcontractors are playing an increasingly important and vital role in this industry itself which is developing quite rapidly.

Age verification is another issue. Much has been made recently of the ability of underage players to participate in Internet gambling without the knowledge or approval of their parents or guardians. While there are systems that might be able to be designed allowing some in person verification of players' ages prior to their registration on the gambling website, none of these systems are foolproof and none them have been proven yet to work 100 percent. This comes at the same time as we hear, as the previous panelists have said, that younger persons are increasingly attracted to gambling activities. And it's important to note here that the use of the Internet and its flashy multimedia capabilities is probably going to be much more attractive to children raised on video games and television than a meeting with a local bookie in a bar or a trip to some far off location.

Problem gambling is another issue that will have to be addressed in the Internet context. With powerful computers giving an individual online gambling site an increasingly accurate ability perhaps to track individual players, some say that online gambling might be the ultimate tool to weed out problem gambling. However, this technology won't go that far toward addressing the real issue here.

"Real world" gamblers -- I use the term "real world" in quotes -- who have addictive behaviors like that, have real world physical limitations. There are distances to travel between different casinos. If they do have a problem and are identified and perhaps stopped, they must at a minimum travel some place else to go to another casino, another gambling operation. In that time family and friends and other people who might have some concern have the ability to stop them from getting on that plane to Las Vegas or whatever might be the case.

On the Internet this isn't the case. If one gambling website would identify somebody as a problem gambler and even if it did take action, it would take nothing more than a couple of clicks of a mouse to transfer yourself to another casino after you're off of there. There are over 100 casinos and more coming online every day. So you can go directly from one addictive location to another, to another and another.

Another assurance that regulators in off-line gambling, in real world gambling, can provide to consumers is the ability to have dispute resolution, an effective and swift resolution of disputes.

I have a couple of other issues that I wanted to discuss in my testimony but I see my time has expired. So I've got the written testimony there. I do want to talk about jurisdiction and I volunteer myself again for any questions the Commissioners might have.

CHAIRMAN JAMES: Thank you very much, Mr. Kesner.