eGold Raided [Forum Archive]

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eGold Raided

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Posted by: Mudge

This article is dated when they are set to print.

JANUARY 9, 2006

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
su****ious 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.

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 () 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. (), 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 ()
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.

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.

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.)

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 (), 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.

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."
( this story has been editied to fit the forum)

By Brian Grow, with John Cady, Susann Rutledge, and David Polek in New York

Posted by: Tough Old Man

hell I signed up for e-gold about 6 months ago and never used it. I just didn't trust there system of operations

Posted by: Stu

i woulndnt touch it, too many bad stories. i know the sources like it though, now i can see why.

Posted by: Mudge

I never used it because the eGold conversion rates were up the YANG (or Yen if you prefer). I'd almost have to presume you were a criminal to pay those rates, one place was charging around 30% if you used a credit card.

EvoCash did poorly too, with hackers and so on.

Posted by: Tough Old Man

Quote:

Originally Posted by Mudge

I never used it because the eGold conversion rates were up the YANG (or Yen if you prefer). I'd almost have to presume you were a criminal to pay those rates, one place was charging around 30% if you used a credit card.

EvoCash did poorly too, with hackers and so on.

that's exacty why I never used it. Those conversion rates looked all fucked up.

Posted by: ZECH

More sources were going to that instead of cash in the mail

Posted by: Mudge

Quote:

Originally Posted by Tough Old Man

that's exacty why I never used it. Those conversion rates looked all fucked up.

To fund $600 would have been like $930 or something, I said hell no. If you thought Western Union was bad, this was downright hellacious.

Posted by: musclepump

Cash in the mail. Tried and true. Risky, but... risky is better than raped.

Posted by: ZECH

Quote:

Originally Posted by musclepump

Cash in the mail. Tried and true. Risky, but... risky is better than raped.

Well, you got to know your sorce. If you trust him, it is better IMO.

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