E-Gold pleads guilty to money laundering

E-Gold pleads guilty to money laundering

Robert Lemos, SecurityFocus 2008-07-23

E-Gold’s days of operating outside U.S. jurisdiction are at an end.

On Monday, the Nevis, West Indies, company, its founder and two senior directors all agreed to plead guilty to various charges related to money laundering and the operation of an unlicensed money transfer business. The agreement ends a nearly four-year investigation into the company and its digital currency service, which — because of the anonymity it provided account holders — became a popular method for cybercriminals to turn ill-gotten proceeds into clean cash.

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“The operations of E-Gold Ltd. and the other defendants undermined the laws designed to maintain the integrity of our financial system and created opportunities for criminal activity,” Jeffrey A. Taylor, U.S. Attorney for the District of Columbia, said in a statement announcing the agreement. “Because of the successful prosecution of these defendants, digital currency providers everywhere are now on notice that they must comply with federal banking laws or they will be subject to prosecution.”

Under the terms of the agreement, E-Gold’s founder, Dr. Douglas Jackson of Melbourne, Florida, and two principal directors will plead guilty to charges of operating an unlicensed money transfer business, according to the statement released by the U.S. Department of Justice. Jackson will also plead guilty to conspiracy to launder money. Both E-Gold and its corporate affiliate Gold & Silver Reserve, a Delaware corporation, have also agreed to plead guilty to conspiracy to launder money.

According to the Justice Department, Jackson faces a sentence of up to 25 years in prison and a fine of up to $750,000, while the two directors — Barry Downey, 48, of Baltimore, and Reid Jackson, 45, of Melbourne — could serve up to 5 years in prison and fines up to $25,000 each. In addition, the companies have agreed to forfeit $1.75 million in profits and could be fined up to a maximum of $3.7 million. In addition, the companies will begin to comply with all application federal and state laws governing money transfer businesses, hire a consultant to aid in the process of adding additional security to its systems, and contract with an auditor to verify the companies’ claims that transactions are backed by gold, the U.S. Department of Justice said in its statement.

Despite the guilty pleas, the founder has vowed that the service will continue to operate.

In a statement titled A New Beginning and posted the company’s blog, Dr. Jackson promised that the company will redesign its service to be less hospitable to criminals.

“The resolution of the criminal case … provides for a second chance, an opportunity to address the flaws embedded in the e-gold system and to transform the ‘e-gold Operation’ into the institutions (sic) I, the other directors, and our long-suffering employees and contractors have always envisioned, one that serves to advance the material welfare of mankind,” Dr Jackson wrote.

In April 2007, the United States indicted E-Gold and its founders, charging the company with offenses related to money laundering. Digital cash services, such as E-Gold, have increasingly been used by cybercriminals as a way to launder money and to accept payment for delivering cybercrime services and malicious code.

A number of U.S. agencies cooperated to investigate E-Gold, including the U.S. Secret Service, the Internal Revenue Service’s Criminal Investigation unit and the FBI.

The United States’ investigation had significantly hampered E-Gold’s business, making it hard for account owners to turn e-gold into cash, Dr. Jackson said in his statement. With the agreement, the company has a chance to emerge as a viable business, he said in an e-mail interview with SecurityFocus.

“From our perspective, the possibility of resolving the legal case in a manner that allows for a path forward, that provides an explicit roadmap enabling e-gold to emerge as a regulated financial institution in full compliance with U.S. law is greatly preferred over continued conflict,” Jackson said. “We acknowledge that we made mistakes and fully accept responsibility for those mistakes.”

While E-Gold’s executives face likely prison terms and the company itself must re-engineer its entire service, Jackson believes that the company can reinvigorate itself. Unlike previous digital currencies, E-Gold’s focus on backing its accounts with gold provides more value than merely having money in a bank, especially in volatile markets, he said.

With previous currencies, “there was no reason for anyone to maintain a balance in digital-cash-branded-dollars when they had the option of holding value in Citibank or Bank America deposit liabilities,” Jackson said. “More importantly, there was never an incentive for anyone to pay (a) … spread to exchange their bank account dollars for digital cash liabilities.”

As for current customers, Jackson hopes they will stay despite the criminal prosecution and the service disruptions that undoubtedly be seen in the future. As part of the plea agreement, E-Gold has made it explicitly against its terms-of-service agreement to use the service to transfer money from criminal proceeds.

“There will be more disruption in the next few months but it will be temporary and will set the stage for powerful new features that enhance the usability and global reach of e-gold,” he said in his statement. “If there is a silver lining, it is that the more illiquid e-gold has become, the more valuable it has become due to the — apparently ongoing — decline of the US dollar relative to gold and other non-financial assets.”

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