E-Gold Indicted for Money-Laundering

Internet-based payment service E-Gold and its owners have been indicted by the U.S. Department of Justice for allegations of knowingly allowing criminals to use their transaction system to move money illegally, and profiting from it.

"As alleged in the indictment, the E-Gold payment system has been a preferred means of payment for child pornography distributors, identity thieves, online scammers, and other criminals around the world to launder their illegal income anonymously," said Alice Fisher, assistant Attorney General of the Criminal Division, in a prepared statement.

Douglas Jackson, a former radiation oncologist who founded E-Gold, has denied the charges, which E-Gold considers more a result of the U.S. Secret Service's "vendetta" against E-Gold, according to a statement the company issued this afternoon. "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," Jackson said in a prepared statement.

He argued that E-Gold "is the most effective of all online payment systems in detecting and interdicting abuse of its system for child pornography-related payments," and pointed out that the company is a founding member of the National Center for Missing and Exploited Children's (NCMEC) Financial Coalition to Eliminate Child Pornography.

"E-Gold is the only member institution to demonstrate with hard, auditable data a dramatic reduction of such payments to virtually zero," Jackson said.

Jackson, who is chairman of E-Gold and CEO of OmniPay -- part of the U.S. contractor that operates E-Gold -- has been a vocal cheerleader and defender of his company, arguing that it has cooperated with federal investigators and doesn't condone cybercriminals using its services. (See Cybercrime: Better Than Drugs.)

Federal officials painted a much darker picture of E-Gold. "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 Jeffrey A. Taylor, U.S. Attorney for the District of Columbia, in a prepared 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."

The indictments didn't surprise many security experts, as E-Gold had previously been under scrutiny by federal investigators. The U.S. Secret Service raided E-Gold's offices and Jackson's in 2005, seizing funds and freezing bank accounts. But the U.S. District Court lifted the freeze order in January of 2006, and according to E-Gold, the main claim by investigators was that it was operating without the proper license as a currency exchange.

E-Gold's digital currency is an alternative payment system backed by stored physical gold. Federal officials said today its format was ripe for abuse by investment scams, credit card and identity fraud, and sellers of online child pornography.

All a user needs is a valid email address to open an E-gold account, and "no other contact information was verified," according to the DOJ's press announcement. The system allowed for account holders to executive anonymous transactions with other parties worldwide, according to the DOJ.

Jackson told Dark Reading in an interview last fall that E-Gold was instrumental in helping investigators track a child pornography ring, and that the company has gotten an unfair rap.

"It's vexing for us... this immediate assumption of complicity," Jackson said. "It's even illogical, the idea that an ambitious business with global aspirations would run the risk of destroying its brand by supporting criminal activities."

E-Gold's closed database leaves nowhere for criminals to hide, he contended. "We've got a permanent record" of transactions.

In a letter to the House of Representatives' Committee on Energy and Commerce Subcommittee on Oversight and Investigations last September, Jackson said E-gold had turned over more than 3,000 buyers of child pornography to law enforcement.

But according to the DOJ indictment, E-Gold and Gold & Silver Reserve -- as well as owners Jackson, Reid Jackson, and Barry Downey -- knew transactions for unlawful activity were being made, yet still allowed the transactions. The indictment also says they operated without a license in D.C. or any other state, and without registering with the federal government -- a violation of federal and state money-transmitting laws. The DOJ indictment alleges the activities occurred from 1999 to December of 2005.

"Unlike some electronic payment methods, E-Gold acted in a manner that blatantly met the needs of a constituency that demanded anonymity," says Ron O'Brien, senior security analyst with Sophos. "Other legitimate methods of electronic payment require verification of identity."

F-Secure says it has seen E-Gold, Webmoney, Western Union, Fethard, and other related services "being used by online criminals for quite a long time." The security firm posted a sample from a notorious Website, Iframecash, which uses exploits such as WMF and .ANI in drive-by attacks, on its blog entry today.

Security experts say if E-Gold were to be found guilty and ultimately shut down, it won't significantly disrupt cybercriminals, however. Cybercriminals will always find a way to move funds, they add.

E-Gold boasts over 3 million accounts in more than 165 countries, and it recently celebrated its tenth anniversary. It has settled over 70 million transactions, worth over $2 billion a year.

DOJ also has put a restraining order on Jackson and the other owners, as well as 24 seizure warrants on over 58 accounts suspected to be associated with money-laundering. That doesn't mean E-Gold has been shut down altogether, however: It can use existing funds to support transactions for accounts that weren't seized and keep selling "precious metals to accomplish the same, once approval has been received," according to the DOJ's press release.

— Kelly Jackson Higgins, Senior Editor, Dark Reading