E-Gold charged with money laundering 1

by : Robert Lemos, SecurityFocus

UPDATE - Following a two-and-a-half year investigation, federal prosecutors charged online payment service E-Gold, its parent company Gold & Silver Reserve, and its three owners with four counts of violating the U.S. laws restricting funds transfers and money laundering, according to an indictment unsealed on Friday.

he court filing claims that the companies' owners -- Dr. Douglas L. Jackson of Satellite Beach, Fla., Reid A. Jackson of Melbourne, Fla., and Barry K. Downey of Woodbine, Md. -- knowingly allowed criminals to use the service and profited from others' crimes. The indictment further claims that, because the service requires no identity verification outside of an e-mail address, E-Gold became the preferred method of payment for online scammers, identity thieves, and child pornographers.

"Douglas 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," Jeffrey Taylor, U.S. Attorney for the District of Columbia, said in a statement. "Not surprisingly, criminals of every stripe gravitated to E-Gold as a place to move their money with impunity."

The digital-cash service denied the charges against the company and its owners and took particular exception to the government's allegations that the E-Gold service knowingly aided child pornographers.

"With regard to child pornography, the government knows full well that their allegations are false, yet they highlight these irresponsible and purposely damaging statements in order to demonize E-Gold in the eyes of the public," Dr. Jackson said in an e-mail statement sent to SecurityFocus, likening the use of child pornography charges to accusations of witchcraft. "In post 9-11 America, child porn and terrorism serve as the denunciations of choice. E-Gold, however, as a matter of incontrovertible fact, is the most effective of all online payment systems in detecting and interdicting abuse of its system for child pornography related payments."

In March 2006, E-Gold joined with 17 other financial institutions and the National Center for Missing and Exploited Children to limit the use of their services by child pornographers.

The indictment comes as e-payment companies are increasingly being used by online criminals to transfer the profits of their crimes. Using services such as E-Gold and WebMoney, groups that control malicious bot programs have offered to pay Webmasters and anyone with control of compromised Web sites typically $80 to $85 per 1,000 installs, according to sites advertising such partnerships. A number of groups that appear to be from China and Eastern Europe use the compromised Web sites to host nearly invisible IFRAME tags, which link to the attacker's site and infect visitor's computers.

Last month, one researcher investigated an online server used to store stolen digital identities and found that it also acted as an e-commerce service, selling the data for funds transferred to WebMoney. Other services occasionally used include Fethard and Western Union.

Yet, E-Gold allegedly has made no significant effort to curb the criminal use of its service, according to the indictment, handed down last Tuesday, but only unsealed on Friday. The service and its owners have purportedly allowed customers to continue using the service, even after other victims and companies flagged the activity as unlawful, the court document stated. In many cases, the database records of accounts would have notations that would imply that the company knew "the account holder was engaged in, including among other things, 'child porn,' 'Scammer,' and 'CC fraud,'" the indictment stated.

Other E-Gold customers have not even tried to hide their business, according to records seized by law enforcement officers and mentioned in the court filing. Thousands of accounts were allegedly opened using the abbreviation for high-yield investment programs (HYIP), a popular investment scam. The company did not include any prohibition on criminal activity in its user license agreement, according to the indictment.

E-Gold has become a popular way -- and possibly, the most popular way -- for online identity thieves, bot masters and fraudsters to transfer money.

Online criminals have tried to sell stolen bank account credentials, credit-card numbers, denial-of-service attacks, and even the holographic dove stickers needed to make counterfeit credit cards, designating E-Gold as the method of payment, said Mikko Hyppönen, chief research officer for antivirus firm F-Secure.

"E-Gold is anonymous and irreversible, which makes it attractive to the the underground as a method of payment," Hyppönen said.

In 2005, the company advertised that in one 24-hour period it transfered more than $6.36 million between E-Gold members accounts, a rate that would add up to more than $2 billion annually.

The company, founded by Dr. Jackson, a board-certified oncologist, and Downey in 1996, was raided in December 2005 by FBI and Secret Service agents. At the time, the U.S. government seized about $800,000 in assets from E-Gold's parent company G&SR, according to Dr. Jackson. On Friday, law enforcement agents seized another $762,000 from E-Gold and $736,000 from G&SR, stated Dr. Jackson in the e-mail statement sent to SecurityFocus.

"Having taken virtually the entire operating funds of G&SR and E-Gold Ltd., that is, the E-Gold in both companies' own E-Gold accounts, it is unclear if the government has even a basic grasp of the operations it has been investigating for three years at a taxpayer expense in the millions," Dr. Jackson stated.

The indictment filed on Friday names the U.S. Secret Service as the primary investigators on the case with the aid of the FBI and the Internal Revenue Service.

"The advent of new electronic currency systems increases the risk that criminals, and possibly terrorists, will exploit these systems to launder money and transfer funds globally to avoid law enforcement scrutiny and circumvent banking regulations and reporting,” James E. Finch, assistant director of the FBI’s Cyber Division, said in a statement. "The FBI will continue to work closely with the Department of Justice and our federal and international law enforcement partners to aggressively investigate and prosecute any, and all, persons or organizations that use these systems to facilitate child pornography distribution, to support organized crime, and to perpetrate financial crimes.”

E-Gold's parent company, Gold & Silver Reserve, is a Delaware corporation, but the company claims the payment service is based in Nevis, West Indies. In the indictment, investigators stated that all the company's files and assets are based in Melbourne, Fla.

United States authorities have obtained a restraining order against the companies' owners to prevent them from moving their assets as well as warrants enabling law enforcement agents to seize more than 58 accounts.

Federal prosecutors have charged the company and its owners with one count of conspiracy to launder monetary instruments, one count of conspiracy to operate an unlicensed money transmitting business, one count of operating an unlicensed money transmitting business and one count of transmitting money without a license. The money laundering conspiracy charge has a maximum sentence of 20 years, while the three other charges each carry a maximum penalty of 5 years in prison.

The charges of conspiracy to launder money and conspiracy to transfer money without a license allow the U.S. to seize all assets resulting from the profit of the alleged crime.

UPDATE: The article was updated with comments and information from E-Gold founder and CEO Douglas Jackson, denying the charges against the company and its owners and, in particular, criticizing federal prosecutors for alleging that the company aided child pornographers.