A federal grand jury last week indicted the three owners of two companies operating a digital currency business on charges of money laundering, conspiracy, and operating an unlicensed money transmitting business.
All three face a maximum sentence of 35 years in prison if found guilty.
The four-count indictment, which was unsealed last Friday, charges e-gold Ltd., Gold & Silver Reserve Inc., and the business owners, Dr. Douglas L. Jackson, of Satellite Beach, Fla.; Reid A. Jackson, of Melbourne, Fla., and Barry K. Downey, of Woodbine, Md. Each is being hit with 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 D.C. law.
"The advent of new electronic currency systems increases the risk that criminals, and possibly terrorists, will exploit these systems to launder money and transfer funds globally to avoid law enforcement scrutiny and circumvent banking regulations and reporting," said Assistant Director James E. Finch, of the FBI's Cyber Division. "The FBI will continue to work closely with the Department of Justice and our federal and international law enforcement partners to aggressively investigate and prosecute any, and all, persons or organizations that use these systems to facilitate child pornography distribution, to support organized crime, and to perpetrate financial crimes."
Founded in the 1990s, e-gold allows users to move monetary funds across the Internet by transferring ownership of gold bars. A user can move money online simply by transferring a tiny amount of gold to another user's account instantly, and e-gold earns a commission on each transfer, according to an advisory from Sophos, a security company.
"E-gold has drawn criticism in the past because it has been claimed the company doesn't do background checks on people applying for accounts, and [it's] too easy to create an account in a phony name," said Graham Cluley, senior technology consultant for Sophos, in a written statement. "Criminals may have been attracted to use systems like e-gold for illegal ends because of the anonymity provided to them compared to high street banks. It is essential that online digital currencies work within the law, assist authorities with their enquiries, and work hard to ensure that their money transfer systems aren't being used by cybercrooks."
The indictment states that e-gold's digital currency functioned as an alternative payment system and was purportedly backed by stored physical gold. Anyone looking to use the e-gold payment system was only required to provide a valid e-mail address to open an account. No other contact information was verified, according to the DOJ. Once an individual opened an e-gold account, he could fund the account using any number of exchangers, which converted national currency into e-gold. Once open and funded, account holders could access their accounts through the Internet and conduct anonymous transactions with other parties anywhere in the world.
The indictment alleges that e-gold has been a "highly favored method of payment by operators of investment scams, credit card and identity fraud, and sellers of online child pornography." The indictment alleges that the defendants conducted fund transfers on behalf of their customers, knowing that the funds involved were the proceeds of unlawful activity; namely child exploitation, credit card fraud, and wire (investment) fraud.
The indictment also alleges that the defendants operated the e-gold operation without a license in the District of Columbia or any other state, and without registering with the federal government, which violates federal and state money transmitting laws. The indictment alleges that this conduct occurred at various times from 1999 through December 2005.
"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 Assistant Attorney General Alice S. Fisher of the Criminal Division. "This indictment demonstrates that the Department of Justice, in cooperation with its law enforcement partners, will aggressively identify and prosecute those who knowingly enable and profit from transmitting the proceeds of criminal activity, online or offline."
Subsequent to the indictment, the Department of Justice also obtained 24 seizure warrants on more than 58 accounts which were believed to be property involved in money laundering and the operation of an unlicensed money transmitting business, according to a release from the U.S. Attorney's Office. The DOJ also obtained a restraining order that prevented the defendants from depleting or dispersing assets.
The restraining order, according to the DOJ, does not limit the e-gold company's ability to use its existing funds to satisfy requests to exchange e-gold into national currency for customers of nonseized accounts, or its ability to sell precious metals to accomplish the same, once approval has been received.
The case is being investigated by the U.S. Secret Service with the assistance of the IRS and the FBI. It is being prosecuted by the U.S. Attorney's Office for the District of Columbia and the Computer Crime and Intellectual Property Section of the Criminal Division.