Online money transfer company pleads guilty to servicing cybercriminals

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The principal owners of E-Gold, an online money transfer system, have pleaded guilty in federal court to operating a business that caters to cybercriminals.

The principal owners of E-Gold, an online money transfer system, have pleaded guilty in federal court to operating a business that caters to cybercriminals.

But now they plan to institute measures to change the company's stigma.

Douglas Jackson, the Nevis-based E-Gold chairman pleaded guilty on Monday in U.S. District Court in Washington, D.C. to conspiracy to engage in money laundering. In addition, Jackson and his brother Reid, with longtime friend, Barry Downey, admitted to operating an unlicensed money transmitting business.

The trio was indicted in April 2007 on charges they ran a business that helped cybercrooks hide their proceeds through the gold-backed digital currency. The service allowed criminals to anonymously transfer funds because only a valid email address was required to open an account.

Roel Schouwenberg, a senior research analyst at anti-virus firm Kaspersky Lab, said E-Gold is one of the preferred means to exchange money in the criminal underground, in which digital commodities such as trojans and stolen identities are bought and sold.

“You can be completely anonymous,” he told SCMagazineUS.com on Wednesday. “If you go to the bank, you need to show some sort of identification. This is a great way to circumvent law enforcement.”

At the time of the indictment, Jackson defended his company, saying it was “ridiculous” to believe E-Gold was created to cater to cybercrooks. Instead, the gold-backed service, founded nearly 12 years ago, was designed to withstand swings in business cycles and give people of all incomes a means to transfer money.

In a blog post on Monday, though, Jackson's tone was considerably more contrite.

“E-Gold's failure to emerge so far is a result of many factors, but the root causes were design flaws in the account creation and provisioning logic that led to the unfortunate consequence of vulnerability to criminal abuse,” Jackson wrote. “Criminal abuse of the E-Gold system, in turn, led to a self-reinforcing negative reputation.”

In a move to conform with U.S. laws, E-Gold has filed an application with the Financial Crimes Enforcement Network (FinCEN), an agency within the U.S. Department of Treasury charged with deterring money laundering, Jackson said. E-Gold is seeking to be licensed as a money services bureau in those states that require it.

In addition, E-Gold plans to add a number of provisions to its user agreement in hopes of stopping criminals from using the system to transfer illicit funds.

Users will be required to confirm that they will not use e-gold to violate any laws to which they are liable. Also, their accounts may be frozen and they could be subject to prosecution if E-Gold investigators determine they are laundering funds.

The company also plans to release a new application that will prohibit one user from running multiple accounts under the control of multiple people.

“The next generation of the E-Gold application will undertake to enforce a ‘one-human being/one E-Gold user' rule,” Jackson wrote. “The advantage from the cybercrime-thwarting standpoint will be an ever-stronger ability to blacklist a person who has abused the E-Gold system.”

According to a Department of Justice news release, E-Gold's operators also agreed to implement a “comprehensive money laundering detection program that will require verified customer identification, suspicious activity reporting and regular supervision by the Internal Revenue Service's Bank Secrecy Act Division.”

Jackson faces a 20-year prison sentence and fines of up to US$750,000. His brother and Downey each face up to five years in prison and a US$25,000 fine. Sentencing is scheduled for Nov. 20.

The company, which does business as E-Gold and Gold & Silver Reserve, also agreed to forfeit US$1.75 million.

See original article on SC Magazine US
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