E-Gold, with the slogan “Better Money Since 1996” has been embroiled in legal battles almost since inception. Now in a stunning court move, its founder has plead guilty to major criminal charges.
E-Gold founder Douglas Jackson has vowed to implement necessary changes in the company. In fact he’s admitted his company’s guilt – on charges of aiding money laundering operations. The specific violations are 18 USC 1960 (Operation of an unlicensed Money Transmitting Business) and 18 USC 1956 (Conspiracy to Commit Money Laundering).
The online payment service e-Gold, as well as its parent company Gold & Silver Reserve, has experienced a sharp decline in business over the past two years from being embroiled in the legal troubles stemming from the charges that their money transmitting business has been used as an avenue to conduct illegal transactions. By admitting his guilt, Jackson and two other senior e-Gold directors hoped be able to “emerge from the turbulence” by adopting strict measures and avoid being indicted due to the criminal activities that the company allegedly lends a hand in.
The Reason For the e-Gold Guilty Plea
The charges on the company base themselves on the illegal and unlicensed money transmitting business which has been taken advantage by shady groups that operate in activities such as child pornography and identity theft, according to the reports issued by the government. Back in 2006, Jackson maintained that these child pornographers and credit card thieves using e-Gold were tracked down by the government through the aid that his company provided and he said that e-Gold and it’s directors were not guilty of accepting direct cash from the clients as payment only arrives through money transfers.
Instead of battling out further with the court, admitting to the design flaws that enabled their services to be used for illegal transactions will likely benefit the company more than a dragged-out court case for years. Mr. Jackson states that the repercussions from this have already cost him seven figures in just the past two and a half years. This has culminated in a raid conducted by the Secret Services on his Melbourne, Florida office during the last month of 2005.
Jackson promises to amend e-Gold’s system for easier detection of money-laundering activities, to fix the design flaws that have initially made the illegal transactions possible, and to provide user restrictions that clearly and strictly emphasize a no-tolerance policy for illegal activities. This includes full investigation and suspension of any e-Gold account should suspicions arise. In his blog, Jackson has also mentioned that previous e-Gold usernames and shady multiple accounts have been blocked with the new system, adding to the company’s sworn compliance to the stated rules of finance.
“A systemic flaw in the e-gold design, present from the very beginning, made it vexingly difficult for e-gold to expel a User, in a truly effective way, for criminal abuse of the system. e-gold investigative staff might detect suspicious activity, block or freeze the offending account, and later discover the same perpetrator had created additional accounts,” says the e-Gold founder. “One element was logic that allowed an e-gold account full privileges from the moment of creation and only revoked those privileges in the event of suspicion that the account holder was seeking to mask their identity or actually engage in illicit activity.Compounding this weakness was an unrestricted ability for Users to create multiple accounts without any obligatory indicator that they were all under the control of one person.”
Aside from these declarations, the court will decide on his sentencing this November which could possibly sentence Jackson to some prison time – possibly 20 years for money-laundering and up to 5 years for the licensing – behind the bars, a fine that reaches about $500,000 for the money laundering charges and about $265,000 for the operation of an unlicensed money transmitting business.
E-Gold has previously handled from 50,000 to a hundred thousand transactions on a regular basis daily. The gold and silver backings are held true – the privately issued digital currency has its base in banks in locations like Dubai and Europe. The decline in company business and its infamous reputation as a “haven for criminals” has been one of the major concerns of the company directors, along with the observance of proper business procedures which have been mandated by the state. Johnson has ended the seemingly neverending legal battle by stating that the only proper resolution of the problem would require a legal intervention – which has led to his guilty plea. E-Gold now plans to move forward with the new changes and reestablish its name and reputation.
The Full Statement from e-Gold founder Douglas Jackson:
November 2008 will mark the 12th anniversary of e-gold’s debut as an alternative global payment system enabling Users – individuals or businesses – to receive payment in gold at extremely low cost and without risk of the sort of payment reversals that characterize all credit based systems.
e-gold has been a pioneer in numerous areas and I am proud of its innovative accomplishments. Since 1996, the Internet has witnessed multiple online payment initiatives, several of them funded with $20-90 million of start-up capital, with distinguished founders and executive cadre, high profile brand name strategic allies, and favorable reception in the business press. But whereas Digicash, Cybercash, Beenz, Flooz, Peppercoin and a host of others each was promoted as the next big thing, all of them combined cumulatively [in their original incarnations – some have been restructured into other business models] executed less transaction volume than e-gold did in a typical single quarter.
But this note is not about success. It is about e-gold’s failure to date to emerge, its failure to transition from a marginal player for early adopters to a respected institution integrated into the global financial mainstream. I am talking about a vision that has not yet been realizedâ€¦ and a determination to fix what needs to be improved.
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. Criminal abuse of the e-gold system, in turn, led to a self-reinforcing negative reputation.
Ultimately, criminal abuse of e-gold reached the point where the US Department of Justice intervened, bringing criminal charges against e-gold Ltd., Gold & Silver Reserve., Inc., (the Operator of e-gold and also of the online exchange service OmniPay), myself, and the other directors for violations of 18 USC 1960 [Operation of an unlicensed Money Transmitting Business] and 18 USC 1956 [Conspiracy to Commit Money Laundering]. The criminal case has been resolved. The resolution of the criminal case however 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 I, the other directors, and our longsuffering employees and contractors have always envisioned, one that serves to advance the material welfare of mankind.
In harmony with this transformation, we acknowledge that e-gold is indeed a Financial Institution or Agency as defined in US law and should be regulated as a Financial Institution. E-gold Ltd. has submitted an application to FinCEN to be registered as a Money Services Business and will be seeking licensure in all states that require it. Most importantly, working in conjunction with US government agencies, we will be exerting every effort to bring e-gold into compliance with US law and regulation as quickly as possible.
I am going to briefly describe the systemic problems we are undertaking to rectify and a roadmap of where the system is heading. Going from where we are now to where we need to be is going to be a bumpy road, especially at first. Many legitimate e-gold Users have already suffered loss over the past year as the measures undertaken by the government to prevent dissipation of assets have severely impacted exchange markets with resulting illiquidity of a magnitude as to effectively make it impracticable to exchange e-gold for conventional money. 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. 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.
e-gold User Agreement Changes
Before proceeding, however, let me make something clear that should have been made more emphatically clear long ago. Use of the e-gold system for criminal activity will not be tolerated. Memorializing this resolve, the following provisions are being added to the e-gold Account User Agreement:
2.3.Â User agrees to not use e-gold in any manner that violates the laws of whatever jurisdiction to which the User is subject.
220.127.116.11.Â If e-gold investigators reasonably suspect that the e-gold account of User is being used to launder the proceeds of crime or for any other criminal purpose, Issuer may freeze the e-gold account and any other e-gold accounts of User.Â Â Additionally, at the sole discretion of Issuer, User will be subject to damages and other penalties, including criminal prosecution where available and the notification of the general public of Userâ€™s actions, at the sole discretion of Issuer.
Design flaws in legacy e-gold system
A systemic flaw in the e-gold design, present from the very beginning, made it vexingly difficult for e-gold to expel a User, in a truly effective way, for criminal abuse of the system. e-gold investigative staff might detect suspicious activity, block or freeze the offending account, and later discover the same perpetrator had created additional accounts.
One element was logic that allowed an e-gold account full privileges from the moment of creation and only revoked those privileges in the event of suspicion that the account holder was seeking to mask their identity or actually engage in illicit activity.
Compounding this weakness was an unrestricted ability for Users to create multiple accounts without any obligatory indicator that they were all under the control of one person.
The next generation of the e-gold application will undertake to enforce a “one-human being/one e-gold User” rule. Instead of the existing logic where a User logs directly into an account, a User in the next generation system logs in as a User. Only validated Users are empowered with the ability to create multiple accounts.
The advantage from the cybercrime-thwarting standpoint will be an ever-stronger ability to blacklist a person who has abused the e-gold system.
e-gold is intensively working on this next generation User-based log-in system but it is likely to be another 6-9Â months to deployment. Meanwhile, emergency surgery is required NOW.
Shock Therapy phase [may it be brief!]
1)Â Effective immediately, new e-gold account creation is suspended until a compliant interim solution for Customer Identification can be ensured.
2)Â We are requesting that autoexchangers – even though the technical beauty of the autoexchanger concept is sublime â€“ cease supporting exchanges to or from e-gold for the time being. The problem with the autoexchanger concept is that although the autoexchangers themselves may be perfectly compliant with requirements [promulgated by Webmoney and e-gold] to automatically put tracking data in their memo fields, and despite the fact that Webmoney is also committed to aiding in the suppression of cybercrime, the fact is that a substantial proportion of the cybercriminals that abuse e-gold have evolved into a modus operandi that involves autoexchanging possible proceeds of crime into Webmoney, sometimes within minutes of receiving the value, thus making interdiction a matter of catch-up or closing the barn door after the horse is gone.
We are confident that a regulated e-gold rebuilt to a more systematic specification will be less hospitable to criminals, and more attractive to mainstream business use without being less accessible to those disregarded by legacy payment systems.
Please accept our apologies for the occasional turbulence you may experience on this journey. And, as always…
Thank you for using e-gold.