e-gold (www.e-gold.com)

UPDATED 04-27-2007

Digital Currency Business E-Gold Indicted for Money Laundering and Illegal Money Transmitting

By: PR Newswire
Apr. 27, 2007 07:36 PM

WASHINGTON, April 27 /PRNewswire-USNewswire/ – A federal grand jury in Washington, D.C. has indicted two companies operating a digital currency business and their owners on charges of money laundering, conspiracy, and operating an unlicensed money transmitting business, Assistant Attorney General Alice S. Fisher of the Criminal Division and U.S. Attorney for the District of Columbia Jeffrey A. Taylor announced today.

The four-count indictment, handed down on April 24, 2007, and unsealed today, charges E-Gold Ltd; Gold and Silver Reserve, Inc.; and their owners Dr. Douglas L. Jackson, of Satellite Beach, Fla.; Reid A. Jackson, of Melbourne, Fla.; and Barry K. Downey, of Woodbine, Md., each 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 under federal law and one count of money transmission without a license under D.C. law.

About e-gold

e-gold is a digital gold currency operated by Gold and Silver Reserve Inc. under e-gold Ltd., and is a system which allows the instant transfer of gold ownership between users. There are over three million e-gold accounts of which about one quarter active.

As of May 2006, e-gold had 3,784,689 grams of gold in storage, which is worth approximately US $86 million. There are typically 66,000 e-gold spends each day, with a total value each day of about US $10.5 million (that is, about 460 kilograms of gold). In comparison, PayPal handles transfers of approximately US $60 million per day.

Crime and fraud

e-gold has notoriously been the medium of choice for many online con-artists, with pyramid schemes and HYIPs (“High Yield Investment Programs”) commonplace. This is presumably partly due to e-gold maintaining its policy of irreversibility of e-gold transactions. According to a website who maintains a comprehensive database of HYIP scams daily, 89% of the scams preferred e-gold as their online payment processors than others.

e-gold and OmniPay have also been accused of being a medium for money laundering, although this is questionable given that there were only 24 customer accounts holding over 10kg of gold (approximate value $200,000) by April 2006. As digital gold currency providers are not banks, they are not legally required to perform various sorts of “know your customer” background checks. However, many e-gold exchange providers require a high level of identification, sometimes more intrusive than a bank.

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.

In January 2006, BusinessWeek reported on the use of the e-gold system by ShadowCrew, an 4000-strong international crime syndicate involved in massive identity theft and fraud. Omar Dhanani of Fountain Valley, California, connected to the ShadowCrew, is an e-gold customer and is said to have moved amounts ranging from $40,000 to $100,000 a week from proceeds of crime through e-gold.

In response, Chairman and founder, Dr. Douglas Jackson published a letter which stated that “e-gold operates legally and does not condone persons attempting to use e-gold for criminal activity. e-gold has a long history of cooperation with law enforcement agencies in the US and worldwide, providing data and investigative assistance in response to lawful requests.” He further noted that “Our staff has participated in hundreds of investigations supporting the FBI, FTC, IRS, DEA, SEC, USPS, and others.”


Non-reversible transactions
Unlike credit cards, there is no way of having transactions reversed, even in case of a legitimate error or an unauthorized spend. e-gold’s Terms of Use stipulate that all spends are final and e-gold cannot be held responsible for any spend. In this respect, an e-gold spend is more akin to a cash transaction (except for the fact that there is a fee levied) while PayPal transfers, for example, could be considered more similar to credit card transactions.

As with any online payment system, e-gold is vulnerable to various threats, notably phishing (for example, forged emails asking for login details) and spyware (such as keystroke logging).

In the early years of e-gold, this problem was widely reported to be rampant. The problem could have been due to the novelty of the system, combined with the irreversibility of payments, combined with the hardness of gold as money, combined with many of the early users being “gold bugs” rather than technically-oriented computer users.

Fortunately around early 2004, this problem seemed to be largely eliminated at a stroke, by e-gold adding a simple IP checking process for spends. (This has often been cited as a good example of how extremely simple solutions to security problems can often have big results.)

Some competing DGCs offer similar features to combat typical, simple, “mass” phishing attacks. e-Bullion utilizes a “two-factor”, token-based authentication solution from CRYPTOCard, an alternative to RSA’s “SecureID”. Pecunix has an extremely secure, somewhat complicated, log-in procedure. 1mdc has a simple PIN-pad addition. GoldMoney allows user certificates to be used. Most systems include an optional “email confirmation” type of process. All of these approaches thwart simple keystroke loggers.

In 2005, the Los Angeles Times reported on a specially created trojan horse that compromised “dozens” to “the low hundreds” of e-gold accounts. While trojans usually silently record the login details of the unsuspecting user, the trojan in question (Win32.Grams) emptied the accounts themselves by transferring the contents to the attacker’s accounts.

Regulatory challenges and shortcomings
e-gold Ltd. was registered in Nevis, West Indies in 1999, but was removed from the register in 2003. It is not a registered entity in Nevis as of at least March 31, 2006.

In September 2004 several Australian e-gold currency exchanges ceased operation due to stricter application of Financial Services Licencing regulations. Digital gold currency exchangers that were closed down by the Australian Securities and Investments Commission (ASIC) include:

  • goldex.net
  • sydneygoldsales.com
  • ozzigold.com

Whilst exchange providers can still operate in Australia many have found it impractical to do so due to proxy issues. Australian residents can exchange e-gold via exchangers in the U.S., Europe or other countries. There appears to be no issues about NZ citizens buying e-gold in NZ, and a number of AU citizens have opened NZ bank accounts, specifically to purchase e-gold from NZ based exchangers. (Although e-gold doesn’t denominate e-gold in NZD.)

Bullion storage
As of November 2005, it is unclear if e-gold has an independent auditor of the physical bars, so there is no way of knowing if e-gold Ltd. really has the reserves to back the currency in the e-gold system. e-gold does maintain an “Examiner”, a web page with updated statistics on outstanding liabilities and the total amount of each precious metal in its holding. While proponents generally consider this assuring enough, some critics remain skeptical.

Limited use
Beginning January 2006, eBay has restricted buyers and sellers from using any online payment system except for PayPal. eBay specifically named e-gold as one of the online payment systems that will result in them cancelling a seller’s account if used. e-gold runs a non-reversible transaction policy, meaning that there is no protection for purchasers if vendors fail to supply goods.

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See also…

Law Wiki: e-gold