May 2, 2007 at 8:19 PM ET
A federal grand jury has indicted online payment company E-Gold, accusing the company of money laundering, conspiracy, and operating an unlicensed money transmitting business.
The indictment, which was unsealed Tuesday, says the company has long known its service was a tool for identity thieves, child pornographers, and other cybercrooks, but did little to stop them.
The company's public denial, published on its Web site, calls the charges "bogus," and says the Justice Departent is trying to “demonize” the service.
Federal authorities accuse E-Gold of helping criminals collect and transfer millions of dollars in ill-gotten gains. The stakes were high, the government alleges. Criminals operating an investment scam using 10 specific E-Gold accounts were able to move $146 million through the E-Gold system, the indictment says. It also accuses the company of knowingly allowing child pornographers to move money through the E-Gold system.
The company denies it has any role in illegal activities.
E-Gold's emphatic denial
"(E-Gold) vigorously denies 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," E-Gold founder Douglas Jackson wrote on the firm’s Web site. "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."
The charges facing Jackson and other company executives are serious – the conspiracy charge relating to money laundering could carry a 20-year prison sentence.
Many consumers might not be familiar with E-Gold, but it's name that appears frequently in chat rooms devoted to criminal activity. Credit card thieves who trade in stole account numbers announce “Will accept E-gold” frequently while soliciting business online.
Web users who want to transfer money using E-Gold simply sign up for the service and deposit $1,000 or more from a traditional bank account into an E-Gold account. Then, electronic money can be sent or accepted online from anywhere in the world, similar to eBay's PayPal service. E-Gold electronic money is backed by the precious metal, the company says.
In 2005, E-Gold said it had 2.5 million accountholders who performed 39,000 transactions involving $6.3 million on a typical day.
Users like 'Mickey' and 'Donald'
In the indictment, federal authorities say it was easy for E-Gold users to remain completely anonymous, making the service a useful tool for criminals. After seizing E-Gold records earlier this year, investigators found accounts opened using names like "Mickey Mouse," "Donald Duck," "Anonymous Man," "bud weiser" and "No name."
But E-Gold's lawyers deny its users can remain anonymous. E-Gold attorney Andrew Ittleman said no consumer can join the service without depositing money through other banking institutions. Records at those institutions make E-Gold user identities traceable.
"If I were a criminal, E-Gold would be the last place I would want to transact," Ittleman said.
The Justice Department disagrees. It says the service was popular with criminals who operated investment scams called HYIPs (high-yield investment programs) -- a form of pyramid scheme -- and other get-rich quick programs. The indictment says thousands of accounts were opened using the letters "hyip" in the account holder's name or e-mail address.
“Douglas Jackson and his associates operated a sophisticated and widespread international money remitting business, unsupervised and unregulated by any entity in the world, which allowed for anonymous transfers of value at a click of a mouse,” said U.S. Attorney Jeffrey A. Taylor, in a statement. “Not surprisingly, criminals of every stripe gravitated to E-Gold as a place to move their money with impunity. As alleged in the indictment, the defendants in this case knowingly allowed them to do so and profited from their crimes.”
Popular with online crooks
Dan Clements runs Affinion Group's CardCops.com, an anti-fraud site that monitors thousands of criminal chat rooms. Online criminals of all stripes often advertise their willingness to trade in E-Gold, he said.
"Everybody advertises they accept E-Gold for payment in ID theft and credit card fraud," he said. That alone doesn't make E-Gold an accomplice, however. Criminals often say they'll take Western Union payments, too, Clements said.
Both payment systems involves what's known in the industry as "final payment" -- once the money goes, there's no way to get it back. Consumers who erroneously send E-Gold or Western Union payment to a criminal cannot get refunds. That stands in start contrast to credit card payments, where consumers regularly get their money back after crimes.
As final payment mechanisms, both Western Union and E-Gold are attractive to criminals.
On its site, E-Gold advertises that there are no chargebacks, and that users "Get paid, stay paid."
"That is a big issue for consumer protection ... payment recovery," said Avivah Litan, a fraud analyst for research firm Gartner. "It's good to have non-bank payment systems but you have to make sure consumers are protected."
'Child porn' and 'scammer' accounts
The government says the existence of criminal activity on the site was obvious -- and that E-Gold officials were aware of it. Account records of some customers were tagged with labels like "child porn," "scammer" and "CC fraud," but allowed to continue performing transactions, the indictment says.
The government said a series of accounts labeled "Kidz Index" and "lolitanymphets" were used in $474,000 worth of transactions.
The indictment also accuses E-Gold of being uncooperative in efforts to track criminal activity. Subpoenas were redirected through a law firm in Bermuda, for example, "falsely making it appear as if the E-Gold operation was actually located offshore." E-Gold's operation was entirely located in Mebourne, Fla., the indictment says.
E-Gold's attorneys say they've been cooperating with regulators for years, and other accusations in the indictment are unfounded. Mitchell Furst, another E-Gold attorney, equated prosecuting E-Gold for cybercrimes with prosecuting an ATM manufacturer after a criminal withdraws cash from a machine and buys drugs with it.
"(This case) is the result of huge misunderstanding and a closed mind on the part of the government as to how E-Gold works," Furst said.