Sunday, June 28, 2009

Regulators Worry About Digital Gold Currency's Potential as Tool for Criminal Activity

By Dorothy Kosich
Wednesday, May 28, 2008

Could digital gold currencies or e-currencies denominated in gold weight be utilized as a tool by terrorist groups? Law enforcement agencies fear the worst may occur.

RENO, NV -- The concept of digital gold currencies (DGC) or e-currency, digital currency or e-money denominated in gold weight is now being offered by such reputable organizations as the London Gold Exchange.

However, digital gold currency has regulators in the United States, Canada and France concerned that it may use a tool favored by ordinary criminal and more sophisticated forms of organized crime to launder money, or utilized in the commission of crime, or even finance terrorism.

In a report originally intended as intelligence for a law enforcement agency, but made public this week by the Globe and Mail through Access to Information requests, Canada's financial regulator, the Financial Transactions and Reports Analysis Centre of Canada, FINTRAC, found Digital Precious Metals Operators "have achieved critical mass on the web."

‘As financial institutions and non-financial businesses increasingly deter money laundering and terrorism financing, adaptable and technology-savvy criminals and terrorist financiers will likely see other unregulated, exploitable avenues to further their nefarious purposes. Digital precious metals may become one of them," FINTRAC warned.

The system works thusly:

1. A user opens an online account with a Digital Precious Metals Operator (DPMO), which are Internet Payment Systems (IPS) providing the user with a digital currency that is allegedly backed by precious metals, which can be used for e-commerce, bill payments, person-to-person payments and other transactions.

2. Most DPMOs often require a username, password and e-mail address to set up a DPM account.

3. Once the account is set up, the user purchases digital currency units via a Digital Currency Exhanger (DCE) to find the user's Digital Precious Metals (DPM) account. DPM accounts are denominated by precious metals weight, rather than cash. The DPM account value fluctuates with the price movements of precious metals.

4. Precious metals e-currencies can be used to purchase goods and services if a merchant will accept them. They can be transferred to another DPM account holder. They can be converted back into national currencies, often paid through wire transfer. And they can be redeemed into physical gold.

"Exploitable weaknesses such as user anonymity and the existence of a network of exchange services-some accepting cash deposits to fund DPM accounts-may facility the placement phase," according to FINTRAC. The anonymity associated with opening the DPM account is maintained through the whole transaction process.

In the layering phase a launderer can ‘cash in' and ‘cash out' his DPM account but does not have to use the same exchange service. Therefore, FINTRAC fears a greater potential exists to "disguise the origin and the destination of funds than with other forms of Internet Payment Systems.

"Moreover, the recent introduction on the market of so called ‘digital gold ATM cards' offers the potential for launderers to re-integrate proceeds into the convention financial system." FINTRAC asserted. The agency fears that the digital gold cards may also allow launderers to "cash out" proceeds, "thereby reintegrating them into the conventional financial system."


In October 2006 The Financial Action Task Force on Money Laundering (FATF), an intergovernmental body founded by the G7 nations to combat money laundering and terrorist financing, also raised concern about "new and innovative methods for electronic cross-border funds transfer" which are emerging globally.

The FATF referred to digital precious metals as a relatively new online money transfer value system that involves the exchange of options or the right to purchase an amount of precious metals at a specific price.

"The oldest and best known of the digital precious metals dealers is e-gold Ltd., which claims to have almost 2 million accounts. ...Transactions involving digital precious metals have immediate finality, which may appeal to on-line merchants that must pay high credit card fees due to high fraud rates. Some precious metals dealers also allow users to maintain anonymous accounts. These traits are concerning to U.S. federal law enforcement agencies," FATF noted.

The task force identified the following as potential risk factors for digital precious metals:

· Anonymous accounts

· Anonymous funding and receipt of funds

· High or nonexistent account funding limits

· Offshore service provides may not observe laws in other jurisdictions

However, FATF also suggested several current and potential strategies to mitigate possible DPM risks:

· Identify account holder

· Maintain transaction record with payer and recipient

· Monitor transactions and report suspicious activity

· Limit funding options

· Implement account book

· Limit access to service


The U.S. Justice Department has prosecuted several cases where convicted criminals allegedly utilized E-gold accounts and wire transfers reportedly during the commission of their crimes.

An internet investment company founded and established a website at (EBV), which claimed to be a Christian-based humanitarian organization that helped individuals to improve their financial situations. The FBI, the Postal Inspection Service and the SEC said participants were required to set up an e-gold account and reportedly transfer their funds from their e-gold account to various EBV and e-gold accounts. The FBI estimated that 26,000 persons throughout the world lost a total of $50 million as a result of the fraud. Two individuals have pleaded guilty.

Six men who administered and operated the website--which the USDOJ said was "one of the largest online centers for trafficking in stolen credit and bank card numbers and identity information"-each pleaded guilty to conspiracy in November 2005. One defendant also pleaded guilty to a second count of unlawful transfer of identification to facilities criminal conduct.

The men said they sent and received payment for illicit merchandise and services via Western Union money transfers and reportedly through digital currencies such as e-gold and Web Money. A moderator for Shadowcrew said site members would send him sums of cash and asserted that he would convert the cash into e-gold electronic currency. He claimed that ‘Shadowcrew members used e-gold to avoid traditional banking systems."

A Mashpee Massachusetts man, David Burgland, told a federal court that he used e-gold to purchase child pornography. The U.S. Department of Justice charged that by June 2006, e-gold "became the only available means of purchasing membership into web sites supplying child pornography."

By April 27, 2007, a Washington, D.C. federal grand jury indicted e-gold and sister company Gold & Silver Reserve with one count each 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 under federal law and one count of money transmission without a license under D.C. law.

The indictment alleged that "e-gold has been a highly favored method of payments by operators of investment scams, credit card and identity fraud, and sellers of online child pornography."


However, In an April 30, 2007, news release, Douglas Jackson, Chairman and Founder of e-gold, said both companies vigorously denied the charges "taking particular exception to the allegations that either company ever turned a blind eye to payments for child pornography or for the sale of stolen identity and credit card information."

"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," he declared, adding that e-gold was a founding member of the National Center for Missing and Exploited Children's Financial Coalition to Eliminate Child Pornography.

Jackson insisted that the government has been confronted with overwhelming evidence that the U.S. Secret Service "had made a horrible mistake in its attack on the e-gold system and its repeated defamatory claims in the media that e-gold is anonymous, untraceable, and inaccessible to U.S. law enforcement."

Along with its attempt to knock e-gold and Gold & Silver Reserve, Jackson asserted that the government has also attacked other prominent exchange services that deal in e-gold type systems including IceGold, the Bullion Exchange, Gitgold, Denver Gold Exchange, AnyGoldNow and Gold Pouch Express. "All of the listed exchange services also follow stringent Customer Identification Program congruent with what would be required of a currency exchange business, if the law supported such a classification," Jackson advised.

"As a direct and immediate result of the seizures, these companies, all of who had built a reputation for honoring their obligations, have been disrupted," according to Jackson.

Most recently, on May 8th, Montanan Jimmy Ray Jones was sentenced to home confinement for nine months in connection with his guilty plea to money laundering and importation of steroids. The U.S. Attorney's Office said Jones had used an e-gold account, along with Western Union wires, Money Grams and other methods to receive payments for his steroid sales.

Dorothy Kosich is the Americas Bureau Chief for Mineweb.

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