Bullion and Bandits: The Improbable Rise and Fall of E-Gold

[Eugen Leitl]

http://www.wired.com/threatlevel/2009/06/e-gold/

    * By Kim Zetter * June 9, 2009  | * 12:00 am  | 

    * Categories: Crime, The Courts

MELBOURNE, Florida b In a sparsely decorated office suite two floors above a
neighborhood of strip malls and car dealerships, former oncologist Douglas
Jackson is struggling to resuscitate a dying dream.

Jackson, 51, is the maverick founder of E-Gold, the first-of-its-kind digital
currency that was once used by millions of people in more than a hundred
countries. Today the currency is barely alive.

Stacks of cardboard evidence boxes in the office, marked bU.S. Secret
Service,b help explain why, as does the pager-sized black box strapped to
Jacksonbs ankle: a tracking device that tells his probation officer whenever
he leaves or enters his home.

bItbs supposed to be jail,b he says. bOnly itbs self-administered.b

Jackson, whose six-month house arrest ends this month, recently met with
Wired.com for his first in-depth interview since pleading guilty last year to
money laundering-related crimes, and to operating an unlicensed money
transmitting service. His tale is one of countless upstarts and entrepreneurs
who approached the internet with big dreams, only to be chastened by sobering
realities. But his rise and fall also offers a unique glimpse at the webbs
frontier halcyon days, and the wilderness landscape that still covers much of
the unregulated and un-policed web, where fraud artists prospect for riches
alongside pioneers, and sometimes stake, and win, a claim on their territory.

Despite the shackle, Jacksonbs conviction isnbt black and white. In a twist
still unacknowledged by prosecutors, Jackson turned E-Gold for a time into
one of law enforcementbs most productive honey pots, providing information
that helped lead to the arrest and conviction of some of the webbs most
wanted credit card thieves and hackers. Hebs now working with regulatory
agencies to try to bring back E-Gold, steps he says he would have taken
voluntarily years ago if authorities had given him a chance.

Following his story, the picture that emerges of Jackson is not a portrait of
a calculating criminal. Rather it is one of a naive visionary who thought his
dream was bigger than any financial regulations, who got in over his head,
and who finally struggled, too late, to make up for his missteps.

bThere was no indication at all that anyone had a problem with what he was
doing,b says Richard Timberlake, a former economics professor at the
University of Georgia and author of several books on U.S. banking. Timberlake
visited Jackson at his E-Gold office in 1997 and vouches for Jacksonbs
innocent intentions. bHe was always very honest and very forthright in what
he was trying to do as a business. Even the Federal Reserve believed it was
legitimate.b

b

The story of the first digital currency backed entirely by gold and silver
began in 1995, while Jackson was still treating cancer patients. A longtime
student of economic history, Jackson was convinced that gold was a superior
currency to paper money, despite the consensus among professional economists
that a gold-standard prevented governments from responding quickly to
monetary crises; when an economy faltered, treasuries couldnbt easily
manufacture gold bars to stimulate it.

The United States dropped its reliance on gold in 1971, but Jackson doubted
the wisdom of this move. bMany a paper currency has spun out of orbit in a
calamitous trajectory,b he once wrote. bThere has never been an instance of
gold or silver being discarded as worthless.b

It was time, Jackson mused, for a radical rethink of money. Had he been born
in another era, he could scarcely have acted on his beliefs. But the nascent
internet changed everything. The international, 24-hour churn of e-commerce
cried out for a monetary system that transcended borders and time zones. So
in early 1996, Jackson began programming a back-end system for a new
electronic currency, practicing medicine by day, and coding by night.

He hired a software engineer to create the user interface, and four months
later launched E-Gold.

As Jackson envisioned it, E-Gold was a private, international currency that
would circulate independent of government controls, and stand impervious to
the marketbs highs and lows. Brimming with evangelical enthusiasm, Jackson
proclaimed it a cure for the modern monetary systembs ills and described it
at one point as ban epochal change in human destinyb and bprobably the
greatest benefit to humanity thatbs ever been thought of.b

Though E-Gold would fail to change the world, libertarians and
privacy-conscious netizens liked the service, which allowed them to open
accounts anonymously. And international sellers appreciated the ease with
which they could transact across borders

Over the next few years, Jackson drained his retirement accounts, sold his
medical practice and charged credit cards to raise more than $1 million to
nurture the fledgling venture. Cynics might have considered him just another
internet hustler looking to strike it rich, but those who knew him say he was
a true believer. bHe truly thinks that having a gold-backed currency is
whatbs needed in the world,b says James Clement, a libertarian attorney who
met Jackson in 2003. bI donbt think anyone would have stuck with it b& other
than that he thinks itbs extremely important and somebody has to do this.b

Jackson drew his inspiration from economist Vera Smithbs influential 1936
treatise The Rationale of Central Banking and the Free Bank Alternative,
which challenged the tenets of banking. bShe wrote in the depths of the
Depression, and poses some of the most compelling questions about central
banking systems,b Jackson says. bCentral banks should attenuate monetary
disorder and prevent fluctuations, but ironically they sometimes amplify it.b

His commitment started to pay off in 2000, when some 50,000 transactions
suddenly passed through his system in just two months b more than the
previous three and a half years combined. By that November, E-Gold, now with
20 employees, had processed 1 million transactions, and Jacksonbs business
reputation was growing. He was invited to speak at the prestigious World Gold
Council conference in Rome, the gold mining industrybs leading event. In
2001, the growth continued, with customer accounts expanding from 134,000 to
nearly 288,000, holding about $16 million in value.

Initially, Jackson stored the companybs reserves of sovereign coins and
ingots in safety deposit boxes in banks around town. When this proved
inconvenient for auditing, the company bought an office safe to hold the gold
and platinum. bThe silver was just stacked around the office,b Jackson says.
Ultimately, he converted the sovereigns and ingots to bars and moved them to
bank vaults in London and Dubai. At E-Goldbs peak, the currency would be
backed by 3.8 metric tons of gold, valued at more than $85 million.

Despite the sudden burst of success, the venture was plagued with setbacks.
E-Goldbs servers buckled under the growing traffic load, hanging transactions
and frustrating users. Copycat entrepreneurs erected their own gold-backed
systems b e-Bullion, GoldMoney and OSGold b and poached E-Gold customers.
When Jackson finally scaled up his infrastructure in 2003, solving the
performance problems, cyber scammers entered the scene, launching a sortie of
phishing attacks against users, tricking thousands of them into disclosing
their E-Gold passwords, then draining the accounts.

Eventually Jackson deployed an anti-phishing remedy, and business rebounded
in September 2004. A year later, customer accounts numbered about 3.5 million
in 165 countries, with 1,000 new accounts opening every day. Millions of
dollars were zipping through E-Goldbs system 24-hours-a-day, bouncing between
the U.S. and Europe, South America and Asia. E-Gold collected 1 percent of
every transaction, with a cap at 50 cents.

E-Gold was now second only to PayPal in the online payment industry. At last,
Jackson says, he felt relief.

bWe had been stuck year-in and year-out on whatever crisis-du-jour required
our immediate attention,b he says. Now bwe felt like webd finally achieved a
turning point.b

But E-Goldbs increasing popularity with customers drew less-welcome attention
as well.

The federal government began to take notice in 2003, when the Secret Service
launched an undercover operation against a website called Shadowcrew b a
legendary forum for bcardersb who trafficked in stolen credit and debit card
numbers. Cyber crooks in Eastern Europe were stealing millions of card
numbers in phishing and skimming scams, then passing the data to accomplices
around the world. The low-end cashers coded the numbers onto blank cards,
then siphoned money from ATMs and transmitted the bulk of proceeds back to
the former Soviet bloc.

When authorities monitored the criminalsb communications, they discovered
that E-Gold was among the cardersb preferred money-transfer methods, because
the system allowed users to open accounts and transfer funds anonymously
anywhere in the world.

When the Shadowcrew investigation wrapped in October 2004 with the shuttering
of the site b and the arrest of more than a dozen members b the Justice
Department turned its sights on E-Gold. Its goal was to force the service to
comply with regulations governing money-transmitting services like Western
Union and Travelex. Federal regulations required those businesses to register
with the Treasury Departmentbs Financial Crimes Enforcement Network (FinCEN),
to be licensed in states that required it, to diligently authenticate the
identity of customers and to file suspicious activity reports on
shady-looking customers. But E-Gold wasnbt doing this.

Jackson believed E-Gold was exempt from regulation because it was a payment
system not a money transmitter. And although it did transfer money, customers
could park balances in their accounts, as with a bank.

But Jackson insisted E-Gold wasnbt a bank, either. It was something new b
something the world and the U.S. government hadnbt seen before. He wasnbt
alone in this view. Many internet-based payment services, including PayPal
during its early years, believed they were exempt from regulation. They
mostly flew under the radar of prosecutors until something brought them into
the spotlight.

Jackson says he got the first inkling of the rampant, organized crime in his
system when he read a June 2005 New York Times story about the growth of the
carding forums. bTo my horror b& E-Gold is mentioned in this ghastly, horrible
way of it being, you know, the bitch of criminals,b he says.

He concedes he knew that Ponzi schemers and other scammers sometimes used his
system , but hebd always responded to government subpoenas for information
about suspicious customer accounts. So he contacted the Secret Service to ask
why the agency hadnbt sought his help to track the crooks in the Times story.
The agency, which was already secretly targeting E-Gold, ignored him. (The
Secret Service didnbt respond to interview inquiries for this story.)

The hammer dropped on E-Gold around 5 p.m. on a mild day in mid-December
2005. A herd of Chevy Suburbans wheeled up to Jacksonbs house and expelled
more than a dozen FBI and Secret Service agents. Simultaneously across town,
the Justice Departmentbs bOperation Goldwireb unfolded with more agents
raiding the offices of Gold and Silver Reserve, the company that operates
E-Gold. A third group descended on a co-location facility in Orlando where
E-Gold Limited, a holding company for E-Goldbs assets, racked its database
servers.

The feds carted away more than 100 boxes of electronic records and paper
files, including birth certificates, photos and a deed to the Jackson family
burial plot. The gold and silver reserves remained safe overseas, but the
government froze the companybs domestic bank accounts. Jacksonbs venture was
dissolving around him.

Jackson wasnbt sure what the feds hoped to find in all those records; once
E-Gold got its systems back online he turned to his database for answers.

He scoured the system for suspicious transactions using key words like bcvv,b
dumpsb and bcob,b and the names of carders hebd read in the Times. He quickly
discovered the disturbing truth about what his libertarian dream had become.
bI found out there was quite a bit of stuff going on which law enforcement
knew about, but wasnbt asking us about,b he says. bI found, holy smokes,
there is a continuing pattern of these so-called carders. Therebs, like, a
ring that I can distinguish.b

One user named bSegvecb received more than half a million dollars from four
others, including a Ukrainian named bMaksikb who sent a rapid stream of cash
totaling $300,000. In the bmemob field of the transactions b where the sender
can state a reason for the payment b Maksik noted that $17,000 was bfor
beer.b Another three transactions totaling $89,000 sent over a weekbs time
were supposedly for Sony Vaio computers.

A New York account-holder named bPotluckb had a pattern of buying $6,000 in
postal money orders twice a month, then exchanging them for e-Gold to send to
Ukraine. Over a year, hebd transmitted about $150,000.

Jackson had uncovered a constellation of shady accounts doing business with
one another. He watched in amazement as the criminal activity expanded before
his eyes, and balances in several accounts ballooned, with no sign that the
account holder intended to move it out. Segvec alone amassed more than
$700,000 in digital gold.

bThey werenbt just using us as a good vehicle to trade their data, they were
parking value in our system,b Jackson says. E-Gold had unwittingly become
banker to the underworld.

Because users could sign up for E-Gold with aliases, there was no easy way
for Jackson to determine the real identity of many of his suspects. But the
criminals became vulnerable the moment they converted their virtual currency
to local cash. This required them to do business with an E-Gold money
exchanger b the online equivalent of currency exchangers at international
airports b whobd ask for valid ID and contact information. Sometimes the
criminals wanted their cash loaded to a debit card and mailed to a drop
address, or wired to a traditional bank account; exchangers would have this
data, too.

Jackson reached out to about a dozen exchangers in Europe and elsewhere with
the account names he was tracking. Some criminals had provided the exchangers
with fake credentials, but a surprising number had given their real names or
addresses. Jackson soon had the identities of some of the most wanted figures
in the underground.

One money exchanger in Northern Ireland revealed that bSegvecb routinely had
packages sent to a Tokyo remailer, who forwarded them to a bStephen Ceresb in
Miami. The same exchanger also sold bStephen Ceresb a Card One debit card
with a daily load limit of $9,500. Jackson obtained a list of transactions on
the card that linked it to a slew of ATM withdrawals in Miami suburbs. A
storm of withdrawals during one five-minute period yielded the cardholder
$8,000 in cash.

Jackson, who had been snubbed by the Secret Service and FBI, took the
information he uncovered to the U.S. Postal Inspector Service, providing
investigators with names, addresses and transaction histories. The postal
inspectors passed the information to overseas allies, the FBI, and eventually
to the Secret Service as well.

It was a devilbs bargain. Once the feds got a taste of what Jackson could
provide, the postal agents began peppering him with requests for more data on
other accounts, promising Jackson theybd follow up with a formal court order
or subpoena later. He cooperated fully, despite the fact that it violated his
user agreement with customers. bWe never did get any legal cover whatsoever,b
he says ruefully. bWe never got our trap-and-trace. We never got our pen
register.b

In March 2006, inspectors asked him for information on a carder named
bJilsi,b whom Jackson traced to a money exchanger in the United Kingdom. The
exchanger gave him a real name b Renu Subramaniam b a 2-year-old confirmed
phone number and the time and location of deposits Subramaniam had made to
two London banks. Jackson passed the information to inspectors who told him
that the phone number, if correct, would be bthe break in the case we have
been waiting for, for quite a long time.b

It wasnbt long before carders were being taken down. In May 2007, Markus
Kellerer, aka Matrix 001, was arrested in Germany. In July 2007, Subramaniam,
who had been an administrator on a carding site called DarkMarket, was
arrested in Britain. That same month, authorities in Florida arrested Julio
Lopez, aka Blinky, who was connected to a ring of Cuban carders. And last
year in Miami, authorities arrested Albert Gonzalez, aka Segvec, allegedly
one of the masterminds behind the hack of TJX and other businesses. Jackson
had provided authorities with information on all of them.

An FBI agent who was involved in the arrest of a number of carders, but asked
not to be identified because he wasnbt authorized to speak, acknowledged that
information Jackson provided was binstrumental in helping track people down.b

A year after he began his probe, Jackson began blocking the accounts
responsible for the suspicious activity, preventing suspected crooks from
getting their loot. E-Gold was on its way to becoming clean, relatively
speaking.

As far as the feds were concerned, however, it was too late. A few months
later, in April 2007, the Justice Department wrapped up its four-year-long
investigation by indicting Jackson and his colleagues on federal charges of
money laundering, conspiracy and operating an unlicensed money transmitting
business.

bDouglas Jackson and his associates operated a sophisticated and widespread
international money remitting business, unsupervised and unregulated by any
entity in the world, which allowed for anonymous transfers of value at a
click of a mouse,b said U.S. Attorney Jeffrey A. Taylor for the District of
Columbia in a press release. bNot surprisingly, criminals of every stripe
gravitated to E-Gold as a place to move their money with impunity. As alleged
in the indictment, the defendants in this case knowingly allowed them to do
so and profited from their crimes.b

Clement, the attorney, disputes the governmentbs depiction of Jackson. bThey
automatically assume that E-Gold somehow made it easy for these people
involved in money laundering, or [sought criminals] as clients,b says
Clement. bBut thatbs completely the opposite of Dougbs attitude toward any
kind of illegal behavior. It would be crazy for somebody to seek out that
kind of business.b

Jackson, whobd hocked his future to start E-Gold, now faced the potential of
a federal prison term. He was frustrated and confused.

bIt never crossed my mind that anyone could seriously want people like us in
prison,b he says. bBut I guess my bigger fear was that we would go bankrupt,
and there would be a train wreck of people that had trusted value to us who
couldnbt get their money.b

Timberlake, the economics professor, is convinced that Jacksonbs radical
dream, his goal of upsetting the economic status quo and overturning the
governmentbs monopoly on money, is what really got E-Gold targeted.

bNo matter how innocent a person is you can always find a law that government
agents can use to convict him of something,b Timberlake says, bAnd this is a
perfect example of it. Any time anybody tries to produce money, the federal
government is going to be on their tail.b

After a year-and-a-half of court wrangling and negotiations, Jackson pleaded
guilty last year to conspiracy to operate an unlicensed money transmitting
service and conspiracy to commit money laundering. In November he was
sentenced to 36 months of supervised released b including six months of house
arrest and electronic monitoring, and 300 hours of community service. In
addition to forfeiting about $1.2 million to the government, his two
companies b Gold and Silver Reserve and E-Gold Limited b were fined $300,000,
to be paid in $10,000 monthly installments beginning last month.

The plea agreement is conditional on Jackson revamping his business to comply
with regulations governing money-transmitting services b a goal that, Jackson
concedes, faces many hurdles. To begin the process of compliance, he
suspended the creation of new accounts. Existing customers are now required
to submit a government-issued photo ID and proof of residence to authenticate
their name, address and other details, and are limited to $1,000 to $3,000 a
month in transactions until they pass muster. Customers in high-risk
countries b such as Nigeria, Russia and Ukraine b are suspended from making
any transactions at all for now. Their money is locked indefinitely in
E-Goldbs servers.

Jackson, who always considered himself one of the good guys, acknowledges
today that he might have done a better job of policing his system from the
start. bIn hindsight therebs any number of things that would have been a
smarter or better way of approaching things,b he says.

Back in his Melbourne office, the blinds are drawn against the harsh sun, and
a wall calendar serves as the roombs sole decor. A belt and freshly
dry-cleaned dress shirt, still swathed in plastic wrap, hang from a metal
shelf. A one-pound plastic jug of protein powder on Jacksonbs desk serves as
a reminder of the weight hebs lost since his legal troubles began. When asked
what toll the trouble has taken on his family b Jackson and his wife are
currently living in different states b therebs a long silence before he
clears his throat.

bItbs been a source of distress,b he says finally. bTen years ago I was an
affluent physician.b

Although E-Gold was occasionally profitable, Jackson only drew a salary, like
his employees. The two upscale homes he once owned with his wife are long
gone. Now his wife and 12-year-old son occupy half a duplex in Pennsylvania
near her family, and Jackson lives in a one-bedroom apartment in Melbourne
with his 17-year-old son, while the latter finishes high school, and Jackson
and his staff attempt to rebuild the business.

Jackson has finally registered E-Gold with FinCEN, and has begun applying to
states for money transmitting licenses. The company is also blocking people
who appear on the Treasury Departmentbs list of Specially Designated
Nationals and plans to follow bank procedures for verifying customer income
and sources of transmitted funds. There are other plans in works to clean up
the system as well.

Therebs a daunting hill to climb before E-Gold will be operational again, and
it remains to be seen whether there will be a market for a scrubbed-down,
government-compliant E-Gold. But Jackson seems relieved to be headed in this
direction.

bOne of the biggest results of this is that webre getting to the place we
wanted to be anyway, which is to have some sort of an explicit set of
standards to build against,b he says.

He maintains that he would have done what authorities now want him to do, if
theybd just worked with him to devise a plan, instead of treating him like a
criminal.

Now, after all of E-Gold ups and down, Jackson hasnbt lost his optimism for
the venture, or his knack for florid prose. As he wrote on his blog last
year, he looks forward to transforming E-Gold from a marginal player to a
respected institution b one, he says, that will serve to badvance the
material welfare of mankind.b

(Photos by Chris Livingston)