Art Rosenberg's Testimony Before the NGISC

5 December 1998

Those who have been following the progress of the National Gambling Impact Study Commission in the US will be interested to hear that the subcommittee addressing internet gambling is definitely gearing up. On Dec. 2, '98, they held hearings in Washington DC, and IGN will run some of the testimony to be presented there.

Also Read Alan Schneider's Testimony


NGISC Regulation, Enforcement, and Internet Subcommittee

December 2, 1998

Prepared by: Art Rosenberg, Chief Operating Officer, VentureTech, Inc., Board of Directors, Interactive Gaming Council

I would like to thank the Commission for the opportunity to provide testimony today relative to the issue of Internet gambling and to apprise the committee on industry actions to establish internal gaming standards. This is especially important in the light of the misinformation and distortion of facts currently being disseminated by certain members of Congress, as well as organizations in opposition to gambling in general and to gambling on the Internet in particular.

I am the Chief Operating Officer of VentureTech, Inc., a publicly traded corporation, that intends to offer Internet gaming to international jurisdictions through our wholly owned subsidiary incorporated outside the United States. I am also on the board of directors of the Interactive Gaming Council and chair the committee seeking to establish an independent oversight organization for the online gaming industry.

The Interactive Gaming Council is a trade association of responsible companies seeking to provide a forum to advance the common interests of the global interactive gaming community. Today, the IGC serves as the industry's public policy advocate and information clearing house. The IGC is also a resource for regulators, legislators, operators and most importantly consumers. I invite the commission to take advantage of this available resource.

I do not intend to take up the Commission's time discussing the moral aspects of gambling. Gambling has been around for thousands of years and will not realistically be legislated out of existence. The worldwide legitimate gaming market has already surpassed $1 trillion with the US being about half that number. Industry analysts predict that world wide Internet gaming has already surpassed $600 million in 1998 from almost zero in 1995. The bottom line is that, most people view gambling as a form of entertainment, not as an evil, and I firmly believe that the further growth of online gambling is inevitable.

The online gaming industry recognizes its obligation to ensure that this anticipated growth in online gaming is conducted in a fair and reasonable manner. One major misconception constantly being promoted is that Companies that operate Internet Gambling sites are illegitimate or are fronts for organized crime organizations. In actuality, the vast majority of companies in the Internet gaming industry are comprised of legitimate businessmen, entrepreneurs and corporate entities (many of which are public) that are merely addressing a viable market demand and opportunity. We do recognize, however, that opponents to Internet gambling have legitimate concerns, but we believe that these concerns can be adequately be addressed with regulation and technology. In recognition of this, the aforementioned Interactive Gaming Council was formed in October of 1996. IGC members are in favor of reasonable regulation and are supporting efforts to that end. In addition, the IGC intends to help "police" its own industry and expose fraudulent operations, if any, whenever identified.

The foremost misconception being disseminated by industry opponents today is that Internet Gambling cannot be regulated and must be prohibited. This could not be farther from reality. The technology being utilized by providers of Internet gambling is computer based and readily lends itself to regulatory reviews, requirements and controls. This is especially true when companies involved in providing the service endorse the regulatory concept. Such regulatory controls as recording transaction records, screening of underage players, consistency of gambling odds, payoffs, electronic funds transfers, wagering limits, etc., are easily adaptable to the advanced technology being utilized. In some cases, as in the example of monitoring potential compulsive gamblers, the capabilities exceed that of traditional "land based" casinos.

Another general misconception is that Consumers will have no protection against unscrupulous operators who will cheat on odds, not make payoffs, entice teenagers to play and induce compulsive gamblers to lose their life's savings. IGC members recognize that the fastest way to failure for the industry is not to operate in a legitimate manner. The nature of the Internet itself will identify those fraudulent operators and "spread the word" with incredible speed. If the Internet gambling industry is perceived as untrustworthy or predatory by the Internet community, that will limit or destroy it faster than any proposed legislation ever could. It is in the self-interest of Internet gambling providers to operate in a responsible and above board manner and see to it that others do the same.

The clientele on the Internet tends to be a better-educated and more affluent group of people then the average demographics spread across the US. Consequently, companies in this industry will likely be held to a higher operating standard then land-based casinos. Companies in this industry will rise or fall depending on their entertainment value and service to the public¾exactly the way that the dynamics of the American free trade marketplace should operate.

It should come as no surprise then that the online gaming industry favors regulation versus prohibition. Given the origins and nature of the Internet, we do not believe that legislative prohibition can effectively void technical circumvention by determined players and operators. What prohibition will do is drive away legitimate operators and open the door to unscrupulous predators to prey on the market. Prohibition will also create a new breed of "at-home" lawbreakers, further siphoning off scarce law enforcement resources for little benefit. Finally prohibition will deprive jurisdictions of valuable tax revenues that can be applied to projects for the public's benefit.

The benefits of regulation versus prohibition are self-evident. It provides for the identification and licensing of legitimate and responsible companies. Jurisdictions and operators can work hand-in-hand to evolve this still fledgling, but rapidly growing, industry. Regulation can effectively control the growth of renegade or merely incompetent operators so that consumers have access to fair and honest games of chance.

To this end, the Interactive Gaming Council took the first steps in 1997 toward establishing a set of internal standards for the industry. These standards were released under the heading of the IGC Code of Conduct. I have provided a set of these standards for your review. They are comprised of ten major points detailing the IGC's position on various requirements related to Internet gaming. To be a member in good standing of the IGC, members must voluntarily adhere to the code of conduct and be in continued compliance with its requirements.

Briefly, they include the following:

Regulatory Compliance - All IGC members will abide by the law and regulations of the jurisdiction where they propose to do business.

Accountability – IGC members agree to make their operating systems, algorithms and practices available for inspection and review by legitimate gaming authorities, if so deemed necessary, by a jurisdiction in which they operate.

Consumer Privacy – IGC members will design and operate their services to afford customers privacy and confidentiality and will publicly post such procedures.

Truth in Advertising – IGC members shall be truthful in all promotions and publish only accurate information about their operations.

Dispute Resolutions and Audit Trails – IGC members will retain detailed transaction records that will be archived, accessible and auditable by legitimate gaming representatives.

Limiting Access by Minors – IGC members will institute adequate technical and operational controls to prohibit minors from accessing their gaming systems.

Control of Compulsive Gambling – IGC members will implement adequate procedures to identify and curtail compulsive gambling.

Banking - IGC will conduct their banking and financial matters in accordance with generally accepted standards of internationally recognized banking institutions.

Prize Payouts – IGC member operators will ensure that there is adequate financing available to pay current obligations in a reasonable period of time.

Corporate Citizenship – IGC member companies will otherwise conduct themselves as responsible corporate citizens.

The Code of Conduct was established as a voluntary mechanism in part to differentiate those companies seeking to operate in an above board manner from those intending to operate otherwise. While this was a step in the right direction, it was clear to the IGC membership that additional measures were required. Consequently, the Interactive Gaming Council put a Seal of Compliance (or SOC) program into development.

The Seal of Compliance (SOC) program is designed to increase consumer and jurisdictional confidence with interactive gaming operators and to maintain a fair and proper gaming environment. The SOC defines detailed operating procedures that include, but are not limited to restricting access to minors, preventing fraud, protecting consumer privacy and ensuring regulatory compliance. Operators of gaming related sites will be able to offer services under a seal (much like a Good Housekeeping seal of approval) earned by demonstrating the company's continued compliance with the IGC's Code of Compliance and their ability to operate and provide responsible gaming related services.

IGC member companies may request this seal by applying to the compliance officer of the IGC. The applicants must be a member in good standing of the IGC and have no outstanding or unresolved legitimate complaints against it. The applicant supplies detailed information to the IGC on its operations and agrees to any due diligence, as deemed necessary, by the compliance officer. For example, the compliance officer will investigate the applicant's procedures for eliminating minors from playing to determine if they are indeed effective, or review financials statements to determine financial viability or to ensure that there visible means for compulsive gamblers to get ready assistance while online and playing. Upon successful completion of the due diligence process, the operator may display this seal on their web site.

The operator will then be reviewed thereafter on a yearly basis to determine continued compliance and on an interim basis as well, if any complaints are lodged against it. These complaints and any proposed disciplinary or enforcement actions then come before a review committee made up of IGC members and external independent parties for review and action.

The Interactive Gaming Council anticipates adopting the final format of the Seal of Compliance by the end of this year. The chair and vice chair of the IGC had the privilege of addressing the International Gaming Regulators and Attorney's meeting in Prague recently. From the initial reaction by attendees to presentations on this matter, it was pleasing to see that international legislators and regulators are amenable to adopting portions of the SOC's criteria when formulating policies and guidelines pertaining to Internet gaming. Investigators were also advised that they would have the cooperation of companies displaying the Seal of Compliance.

Judging from some of the doubtful looks in the room, it is apparent that what we are addressing here is a form of self-regulation. And while self-regulation typically evokes skepticism in many parties, I submit that it is the only logical first step in an environment where today there is a limited degree of authority or control over the Internet and where international jurisdictions are searching for direction.

In seeming validation of this, the White House itself just released a new policy report on electronic commerce {Financial Times (12/01/98) P. 8; Suzman, Mark) that argues for industry self-regulation of the Internet. To quote President Clinton¾"the Internet should be a free trade zone with incentives for competition, protection for consumers and children, supervised not by governments, but by people who use the Internet every day." The report dismissed the idea of applying other high-tech sector regulations to the Internet. The report further claims that the self-regulatory approach to the Internet is gaining in acceptance around the world.

The IGC recognizes, however, that this form of self-regulation is only an interim solution to a more far-reaching issue. The Internet itself and online gaming in particular are global phenomena crossing over jurisdictional boundaries as though they are transparent, which are for all practical purposes they are. Consequently, the solution needs to be one that incorporates an international view versus one of local or regional nature. The need for an international control board to oversee and regulate the industry's operations {and not the Internet} is evident.

Some progressive countries, such as Australia, are taking an informed view that recognizes that Internet gambling is an inevitability and should be regulated as a legitimate business enterprise with reciprocity in taxation among participating countries. We encourage the US government and all other nations to follow in these footsteps.

We further recommend that an international body be formed to further define the rules and regulations governing online gaming. These will be codified into a statutory framework for use by licensing jurisdictions, which we expect, will grow exponentially in time. This international body will serve as an investigation and certification authority as well as providing for enforcement and adjudication. Finally it will be charged with implementing a plan to administer an international tax structure.

We realize that this will not come about overnight and not likely by the time the commission's report is submitted for consideration. This is why the IGC is aggressively pursuing its own short-term course of action despite whatever doubts or skepticism may exist with our opposition.

I do not intend to represent the current state of Internet gambling as a foolproof operation with no associated negative aspects. But what conventional business industries, if any, have none? As a member in good standing of the Interactive Gaming Council and a committee chairman, I recognize the potential problems associated with the convergence of these two enticing industries, the Internet and online gaming. However, I also recognize that the legitimately recognized online gaming industry is committed to operating its business in a responsible, fair and equitable manner. Plainly put, the "genie" is out of the bottle and online gaming is here to stay in one form or another. We challenge the US government to work with the industry to formulate a regulatory environment that will benefit all parties concerned.

I will be happy to address any questions you may have in the time allotted.