Money movement via the Internet has been a growing trend as more people become confident and familiar with the online banking industries. However, many online financial transactions are also used by criminal groups, who seek out new methods to mask their identities and transactions. Most of the businesses providing these transactions also have little government oversight and are largely unregulated. As a result, several digital currency businesses have become popular with the criminal crowd as they provide a vehicle for unlawful people to conduct financial transactions with relative anonymity in furtherance of their illegal activities.
Two businesses utilized often in the crime underworld were shut down last week by federal investigators as a four-count federal indictment was unsealed on April 27, 2007. The Grand Jury indictment charged two Internet companies, E-Gold Ltd., and its parent company, Gold & Silver Reserve, Inc., both of which had been operating as digital currency businesses. The charges include
• 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 a District of Columbia (DC) law
The indictment alleged that E-Gold was a favored method of payment by operators of several illegal online activities, including credit card and identity fraud, investment scams, and online child pornography brokers. The three owners of E-Gold and Gold and Silver Reserve, Inc., were also charged during the investigations conducted over the past two years by the US Secret Service, (USSS), Federal Bureau of Investigation (FBI) and the Internal Revenue Service (IRS).
Bank Secrecy Act (BSA) requirements include provisions stating that all persons and businesses engaged in money service business activities must register all agents and participating corporations with the US government. Corresponding records must also be kept for certain transactions that meet a threshold amount. When this provision is not adhered to, civil penalties and fines accrue daily.
Anonymous Banking
According to the indictment, E-Gold’s digital currency, “E-Gold,” functioned as an alternative payment system and was supposedly backed by stored physical gold. In previous testimony before a US House financial subcommittee, one owner of E-Gold indicated that the business had over 4 million accounts and had completed more than 67 million transactions, and processed approximately 70,000 daily account transfers, which exceeded over US $2 billion annually. It was believed that E-Gold had more than US $68 million in gold on deposit at the London Bullion Market Association member repositories.
Individuals seeking to use the E-Gold payment system were only required to provide a valid email address to open an E-Gold account, and no other contact information was needed or verified to conduct transactions. It is alleged that numerous accounts were opened using fictitious names such as “Mickey Mouse,” and “No Name,” to conduct international transactions without the required government oversight. Once an account was opened individuals could fund the account using any number of exchangers, which converted national currency into E-Gold. Once an account was active and funded, account holders could access their accounts online and conduct unlimited transactions seemingly with anonymity with anyone, anywhere.
Future Impact
Internet gold and currency-transfer businesses have been operational for over 10 years. This is not the first time that a digital currency business has been targeted, and probably will not be the last, as new businesses are opened frequently to replace those previously targeted and closed. One previous business, Gold Age, was closed in 2006 after charges from the State of New York were announced for violation of that state’s banking laws. Gold Age was alleged to have been a frequent avenue for money movement by an international crime group involved in massive identity theft and fraud.
With the indictment of E-Gold, other digital currency businesses are on notice. However, there will likely be little impact to the volume of transactions seen with these businesses. Criminal elements need vehicles to move their monies and will turn to unregulated businesses in an effort to avoid detection and prosecution. Unless regulations are enhanced and enacted, there will likely continue to be digital currency businesses operating with ties to criminal activities.
