Gold Rush

[R. A. Hettinga]

--- begin forwarded text


 Date: Tue, 3 Jan 2006 12:44:38 -0500
 To: Philodox Clips List <clips at philodox.com>
 From: "R. A. Hettinga" <rah at shipwright.com>
 Subject: Gold Rush

 <http://www.businessweek.com/magazine/content/06_02/b3966094.htm>

 Business Week




 JANUARY 9, 2006   *  Editions: N. America | Europe | Asia | Edition Preference



 INVESTIGATIVE REPORT

 Gold Rush

 Online payment systems like e-gold Ltd. are becoming the currency of choice
 for cybercrooks

 Crime courses through the internet in ever-expanding variety. Hackers
 brazenly hawk stolen bank and credit-card information. Pornographers peddle
 pictures of little boys and girls. Money launderers make illicit cash
 disappear in a maze of online accounts. Diverse as they are, many of these
 cybercriminals have something important in common: e-gold Ltd.



 E-gold is a "digital currency." Opening an account at www.e-gold.com takes
 only a few clicks of a mouse. Customers can use a false name if they like
 because no one checks. With a credit card or wire transfer, a user buys
 units of e-gold. Those units can then be transferred with a few more clicks
 to anyone else with an e-gold account. For the recipient, cashing out --
 changing e-gold back to regular money -- is just as convenient and often
 just as anonymous.

 E-gold appeals to "gold bugs": people who invest in the precious metal and
 believe money ought to be anchored to it. E-gold boasts that its digital
 currency is backed by a stash of gold bars stored in London and Dubai. But
 e-gold also appeals to savvy online crooks who want to move money quickly
 and without detection. American banks and conventional cash transmitters
 like Western Union are legally required to monitor customers and report
 suspicious transactions to the government. E-gold seems to go out of its
 way to avoid such obligations. Its operations are in Florida, but in 2000,
 its principals registered the company in the lightly regulated Caribbean
 haven of Nevis.

 Law enforcement officials worry that the little-known digital currency
 industry is becoming the money laundering machine of choice for
 cybercriminals. On the evening of Dec. 19, agents with the Federal Bureau
 of Investigation and Secret Service raided the Melbourne (Fla.) office of
 e-gold's parent company, Gold & Silver Reserve Inc., and the nearby home of
 its founder, Douglas L. Jackson. Agents copied documents and computer
 files, but so far no charges have been brought. The Secret Service and the
 FBI declined to comment on the raid. Jackson has denied any wrongdoing,
 though the raid isn't the first indication that federal investigators view
 e-gold as a magnet for online misdeeds. The FBI separately is pursuing
 about a dozen probes in which e-gold appears as a "common denominator," a
 senior agent says.

 The potential danger goes beyond e-gold. Investigators say other digital
 currencies are similarly used for corrupt purposes. All told, there are at
 least a dozen such services worldwide, based in places like Russia and
 Panama. Eight of them, including e-gold, claim to be backed by actual
 bullion. As a group, these firms do billions of dollars a year in
 transactions, according to Jim Davidson, a spokesman for the Global Digital
 Currency Assn. in New York. E-gold and its rivals make money by charging
 small percentage fees on those transactions.

 Most of the law enforcement interest in e-gold involves alleged fraud and
 money laundering by its users. A tour of some outlaw corners of the
 Internet illustrates why. One Web site called CC-cards -- where
 cyberthieves sell pilfered bank account and credit-card information --
 often asks for payment via e-gold. Some sites pushing child pornography
 have dropped Visa and MasterCard recently in favor of e-gold, according to
 the National Center for Missing & Exploited Children, which tracks underage
 porn.

 But U.S. officials have another concern: that e-gold and rival digital
 currencies could be used to finance terrorism. It's a notion the companies
 all reject.

 SUBPOENA CENTRAL

 The man behinD e-gold, Doug Jackson, is a tall, powerfully built former
 oncologist. A fan of the gold standard, Jackson, 49, became a pioneer in
 digital currency when he set out a decade ago to create what he describes
 as a private gold-based monetary system. He envisioned e-gold as a currency
 that would be accepted at Wal-Mart (WMT ) while also permitting peasants
 from China to Peru to offer products at stable prices. "I thought there
 would be this flock of e-gold users, and I would be their messiah," he
 says. "It just didn't happen."

 What did happen, according to law enforcement officials, was that a pack of
 felons flocked to Jackson's brainchild. Sitting in an undecorated
 conference room in the Melbourne office three months before the federal
 raid, he acknowledged that he had a "six-inch pile" of subpoenas from such
 agencies as the FBI, the Securities & Exchange Commission, and the U.S.
 Postal Inspection Service -- all seeking information about some of his more
 suspect customers. Investigators say Jackson may have begun his quirky
 business with innocent intentions. But in recent years he has turned a
 blind eye, the officials say, to mounting evidence that e-gold has
 attracted a seamy clientele. The federal raid suggests that agents are
 intensifying their focus on e-gold and its potential criminal liability.

 Jackson didn't respond to messages after the raid. But earlier, he denied
 vehemently that he has looked away from crime. He said he responds as
 quickly as possible to official inquiries. He acknowledged, though, that
 his staff of 15 includes only one in-house investigator who struggles to
 keep up with all those subpoenas. E-gold has about 1.2 million funded
 accounts through which transactions worth $1.5 billion were conducted in
 2005, he says. As for the idea that he should systematically monitor
 customer identities and money flows, he argues that's not his job: "We
 don't validate because we're unlike any other system."

 Federal officials reluctantly confirm this loophole: E-gold and other
 digital currencies don't neatly fit the definition of financial
 institutions covered by existing self-monitoring rules established under
 the Bank Secrecy Act and USA Patriot Act. "It's not like it's regulated by
 someone else; it's not regulated," says Mark Rasch, senior vice-president
 of the Internet security firm Solutionary Inc. and former head of the
 Justice Dept.'s computer crime unit. The Treasury Dept.'s Financial Crimes
 Enforcement Network (FinCEN) is studying ways to close the regulatory gap.
 Meanwhile, U.S. officials say e-gold and similar companies should
 voluntarily do more to deter crime.

 Started in 1996, e-gold was part of an early wave of Internet payment
 systems that converted conventional money into a Web currency. Most of
 those pioneers soon flopped, because consumers resisted paying fees to get
 Web cash. Others, such as PayPal, now a unit of online auction giant eBay
 Inc. (EBAY ), evolved into credit-card processing services.

 E-gold and a handful of rivals, including one called GoldMoney, were
 different. Their founders believed that tying monetary exchange to a strict
 gold standard would achieve greater economic stability. The Internet
 provided a ready venue for gold bugs the same way that it offered a soapbox
 to adherents of every other strain of thought. Jackson, an Army veteran and
 a graduate of Pennsylvania State University's medical school, was
 practicing oncology in Melbourne in the mid-1990s when he began reading
 about libertarianism and monetary theory. The married father of two adopted
 boys began to change his thinking. He scoured the works of libertarian
 novelist and philosopher Ayn Rand and was impressed by economist Friedrich
 A. Hayek's The Road to Serfdom, an influential 1944 condemnation of
 government control of the economy. "It looked like a lot of the suffering
 of recent centuries -- some of the scale of wars, some of the economic
 dislocations -- could be traced back to credit cycles. And credit cycles
 could be traced back to monetary manipulation" by governments, Jackson
 says. "I was very moved by it."

 INTELLECTUAL CONVERSION

 Gold, he concluded, was the cure. The U.S. stopped tying the dollar to a
 fixed amount of gold in 1971. But Jackson and a friend, attorney Barry K.
 Downey, decided to start what amounted to their own gold-backed currency.
 Jackson liquidated retirement accounts and sold his medical practice to
 help raise an initial $900,000. A former colleague noticed him working on
 computer code around the clock at his stand-up doctor's desk. He often
 forgot to eat and lost weight. Along the way, he stopped attending church.
 Jackson confirms all this but stresses that he continued to provide
 excellent care for his patients until he bowed out of medicine completely
 in 1998.

 In a series of interviews with Jackson, his statements about e-gold swing
 from grandiose to resigned. "We want e-gold to be recognized as a privately
 issued currency and to be treated as a foreign currency" by the U.S. and
 other governments, he says at one point. But e-gold's offices don't conjure
 up images of a grand central bank. Jackson, who during one interview wore
 neatly pressed slacks and a yellow-striped shirt, runs his currency from a
 Spartan suite on the third floor of a Bank of America (BAC ) building.

 Online currencies are patronized by software companies and other small
 businesses. Jackson says that the fees he charges customers -- for
 converting real money to e-gold, administering accounts, and doing
 transfers -- generated about $2 million in revenue in 2005 for e-gold's
 parent company, Gold & Silver Reserve, which he also controls. The
 operation turns a profit, he adds, but he won't say how much.

 Mark Jeftovic considers himself a big fan of digital currencies -- but one
 now skeptical about e-gold. The founder of easyDNS Technologies Inc., an
 Internet domain name registrar in Toronto, he started accepting e-gold as
 payment in 2003. Jeftovic believes that digital currencies will minimize
 the harm of government-induced inflation. But in early 2005, investigators
 from the Royal Canadian Mounted Police visited easyDNS seeking information
 about cybercriminals allegedly using the registrar's services. It turned
 out that some of the suspects had paid Jeftovic's company via e-gold, he
 says. Angered by the police scrutiny, Jeftovic now plans to offer rival
 digital currency GoldMoney in addition to e-gold. "I like the digital
 currency and e-gold economy, and I want to support it," he says. "But you
 have to run a cleaner shop than this."

 The RCMP didn't respond to requests for comment. Jackson says he wasn't
 aware of Jeftovic's concerns or the RCMP investigation. He says that e-gold
 responds as quickly as possible to inquiries from law enforcement agencies
 and readily provides them with user names, account numbers, and transaction
 histories.

 A number of gold buffs and some law enforcement officials see GoldMoney as
 a reputable alternative in the digital currency field. Based in the British
 Channel island of Jersey, GoldMoney is run by James Turk, a precious metals
 trader and former Chase Manhattan banker. He says that his company requires
 new customers to mail in copies of identity documents and then checks the
 data against lists of suspected terrorists and money launderers. The
 accounting giant Deloitte & Touche annually audits its gold holdings and
 security measures.

 E-gold's Jackson says those steps are expensive and unnecessary. OmniPay,
 an affiliate of e-gold, is one of more than a dozen "digital currency
 exchange agents" that handle the conversion of conventional currency into
 e-gold. Jackson says that to authenticate users' identities, OmniPay sends
 them a special code via e-mail and conventional mail. But users aren't
 required to prove their identity, so it isn't clear what this accomplishes.
 Jackson says that his lone in-house investigator looks for obvious fraud,
 such as a customer using "China" as his only address.

 Some of e-gold's customers have been unsavory. Omar Dhanani used e-gold to
 launder money for the ShadowCrew, a cybercrime gang with 4,000 members
 worldwide, according to an October, 2004, affidavit by a Secret Service
 agent. Based in a stucco house in Fountain Valley, Calif., Dhanani used his
 PC to hide the money trail from the sale of thousands of stolen identities,
 bank accounts, and credit-card numbers, the government said. Accomplices
 sent him Western Union (FDC ) money orders, which, for a fee, he filtered
 through e-gold accounts. On Oct. 4, 2004, Dhanani, 22, who used the
 nickname Voleur -- French for thief -- boasted in a chat room that he moved
 between $40,000 and $100,000 a week. He pled guilty in November to
 conspiracy to commit fraud and faces up to five years in prison.

 "GOOD FENCES"

 E-gold's Jackson says the company was never contacted by the Secret Service
 regarding Dhanani and had no duty to sniff him out. E-gold's outside
 attorney, Mitchell S. Fuerst, calls statements in the Secret Service
 affidavit alleging that e-gold was used to facilitate illegal activity
 "nonsense." Fuerst argues that the responsibility for policing the identity
 and activities of e-gold account holders lies with the banks and other
 regulated institutions from which money is transferred into e-gold's
 system. Jackson goes further, insisting it's impossible to launder money
 through e-gold -- a contention that law enforcers say is contradicted by
 the Dhanani case and others.

 Jackson has made no secret of his desire to avoid U.S. government scrutiny.
 In 2000, he and his partner Downey registered e-gold Ltd. in Nevis, hoping
 the maneuver would add another layer of insulation from U.S. regulation.
 Jackson concedes that e-gold has existed in Nevis only as "a piece of
 paper." Its parent administers e-gold services from the Melbourne office;
 the operation's computer servers are in Orlando. Jackson says he chose the
 tiny island because registration there is inexpensive, and the government
 follows well-established British commercial law. Nevis is also known for
 lax financial regulation. Referring to his desire to create legal distance
 from U.S. officials, Jackson says: "There's an element of good fences make
 good neighbors."

 On Dec. 5, two weeks before the federal raid in Melbourne, the Nevis
 Financial Services Regulation & Supervision Dept. posted a notice on its
 Web site that e-gold had disseminated "misleading information" about its
 legal status. Nevis officials say that the company was removed from the
 island's corporate registry in July, 2003, for failure to pay the annual
 registration fee of $220. Jackson didn't respond to questions about this.

 Back in the U.S., e-gold has tried to shield itself semantically, avoiding
 basic banking terms such as "deposit" and "withdrawal" that could increase
 its risk of being categorized as a regulated financial institution. E-gold
 calls such transactions "in-exchange" and "out-exchange." Jackson says:
 "It's not a desire to be tricky. It's a desire to be accurate. It's
 important not to be misconstrued as a bank."

 Whatever its legal status, e-gold's usefulness to scam artists was
 colorfully illustrated by E-Biz Ventures, which allegedly portrayed itself
 as a Christian-influenced organization that offered investors returns as
 high as 100%. E-Biz' proprietor, Donald A. English of Midwest City, Okla.,
 allegedly highlighted his reliance on e-gold to appeal to victims' fear of
 the federal government and their desire for anonymity. E-Biz investors
 opened e-gold accounts and transferred funds to accounts controlled by
 English. He shifted e-gold among more than 25,000 accounts, using new
 investors' money to pay off some older ones. The scam took in $50 million
 before the SEC shut it down in 2001. Investors lost $8.8 million. Later
 prosecuted in federal court in Oklahoma City, English pled guilty to wire
 fraud and last May was sentenced to five years in prison.

 Jackson says that when subpoenaed by the SEC in the civil part of the E-Biz
 case, e-gold supplied transaction data. A Jackson aide worked closely with
 investigators in the civil case. "They responded timely to every request
 for assistance," says Chris Condren, E-Biz' court-appointed receiver.

 Evidence of e-gold's suspect following is found on numerous Web sites. A
 contributor to Cannabis Edge, a site for marijuana growers, has provided
 advice on how to employ e-gold and two other digital currencies -- WebMoney
 and NetPay -- to hide illicit proceeds "beyond the reach of U.S. pigs."
 E-gold in particular "has strong security," is "easy to use, and is
 anonymous," said the writer, who used the name Bill Shakespeare.
 (Moscow-based WebMoney and NetPay, which is based in Panama City, Panama,
 both deny any wrongdoing.)

 In addition to its abundant offerings of stolen financial data -- with
 payment frequently sought via e-gold -- the site CC-cards carried a message
 in November from a hacker using the name HellStorm. He advertised that for
 a 5% fee, he would set up and fund e-gold accounts for those who are in a
 hurry to do business and want to shield their identity. Users of CC-cards
 can make donations for the upkeep of the site by clicking on a link that
 connects to an e-gold account. (E-mails seeking comment from CC-cards and
 Cannabis Edge weren't answered.)

 Jackson says that he wasn't aware that e-gold was being recommended or used
 on outlaw Web sites until he was so informed by BusinessWeek. The company
 has since blocked the CC-cards donation account, he says. There is little
 the company can do about such situations, Jackson contends, unless law
 enforcement brings them to e-gold's attention. Once informed, "we can set a
 value limit to prevent an account from receiving further payments," he
 says. "We can identify if there is a constellation of accounts controlled
 by the same miscreant." Jackson adds: "If we get an appropriate court
 order, we can monitor and assist in a sting that freezes value."

 The danger of Web sites like CC-cards that are fueled in part by e-gold
 became very apparent to Kimberly S. Troyer. Her identity went up for sale
 there last September. Among the 22 items CC-cards put on the block: her
 checking account number at Bank One (JPM ), driver's license number, Social
 Security number, birth date, and mother's maiden name. The price for all
 that: $30 of e-gold. Informed of the offer by BusinessWeek in December,
 Troyer, a 33-year-old accounting student at Davenport College in South
 Bend, Ind., is changing all of her identity documents. She believes she
 escaped without losing any money. But someone hijacked her e-Bay account
 and changed the address to one in China so that it could receive payments
 from the sale of iPods Troyer didn't own. "It makes me sick to my stomach,"
 she says. Jackson says e-gold can't do much about such cases until he's
 formally alerted by the government.

 There is one crime, however, to which Jackson has reacted more
 aggressively: child pornography. In August, he attended a conference in
 Alexandria, Va., organized by the National Center for Missing & Exploited
 Children. The center is trying to enlist banks and credit-card companies in
 a crackdown on payment schemes used by child porn Web sites. "There are
 fewer and fewer sites with Visa -- and more and more with e-gold," says the
 center's chief executive, Ernest E. Allen. The center has a policy of not
 publicly identifying child porn sites it tracks. Jackson says he was
 appalled to find e-gold on the list of institutions used by the porn sites.
 He provided the center with instructions on how to seek e-gold records, and
 the group says it is pleased with e-gold's cooperation.

 Daniel J. Larkin, head of the FBI's Internet Crime Complaint Center, says
 that in recent years, e-gold has hidden behind "a plausible-deniability
 fog." Now the fog may be lifting as the subpoenas pile up and federal
 agents begin to examine what they confiscated in their Dec. 19 raid. The
 Internal Revenue Service is separately auditing e-gold's parent, and
 Jackson says e-gold has voluntarily agreed to cooperate with an IRS review
 of its procedures for preventing money laundering. The IRS declined to
 comment.

 TERROR TOOL?

 Before the recent raid, Jackson said that responding to subpoenas and other
 government inquiries has been distracting and expensive. Although he
 emphasized that e-gold isn't obliged to monitor its clientele, he said that
 he could have paid more attention to vetting account holders were it not
 for the outside interruptions. He added that he plans to switch from an
 account-based log-in system to a user-based one to monitor customers more
 closely.

 The worst-case scenario, so far undetected by officials, would be the use
 of e-gold by financiers of terrorism. Experts on terrorism funding note
 that digital currencies resemble the money-changing system known as hawala,
 which Middle Eastern terrorists have used. A customer gives money to a
 hawala service, which then telephones a similar service in another city or
 country that doles out money to a designated recipient. Many hawala outfits
 have been shut down since September 11, making digital currencies a logical
 next step, says Phil Williams, a professor of international affairs at the
 University of Pittsburgh and consultant to the United Nations on terrorism
 financing. "At some point, this is going to be used" by terrorists,
 Williams says.

 Jackson scoffs at this notion. "We are not bad guys, and the e-gold system
 simply does not pose an undue risk for usage for terrorist purposes," he
 wrote in an e-mail on Jan. 20, 2005, to AUSTRAC, Australia's
 anti-money-laundering regulator, which was looking generally into potential
 terrorist use of digital currency.

 But e-gold attorney Fuerst said in early December that the company quickly
 complied with requests in 2005 from Russian law enforcement and the FBI for
 records connected to a would-be terrorist in Russia. This person allegedly
 threatened to "blow something up," Fuerst said, unless a ransom was paid
 into his e-gold account. The FBI and the Russian Interior Ministry declined
 to comment.

 This month's raid could signal serious trouble for e-gold. But cybercrime
 experts predict that if the company falters, nefarious business will simply
 transfer to other digital currencies, especially ones based in countries
 that have lax law enforcement. Amir Orad, executive vice-president of
 cybersecurity firm Cyota, says that putting e-gold out of business "would
 not stop anything."


 --
 -----------------
 R. A. Hettinga <mailto: rah at ibuc.com>
 The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
 44 Farquhar Street, Boston, MA 02131 USA
 "... however it may deserve respect for its usefulness and antiquity,
 [predicting the end of the world] has not been found agreeable to
 experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

--- end forwarded text


-- 
-----------------
R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'