Financial Cryptography

e-gold responds -- denies Criminal Charges

Ordinarily I wouldn't follow the course of a case in such detail, contenting to only pick out the big picture and the important messages for Financial Cryptography readers. However, because of the 'special circumstances' in the e-gold case, I'll post the full response by Dr Jackson on the indictment from last week.

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e-gold® Founder Denies Criminal Charges
April 30, 2007
Melbourne, FL

On April 24, 2007, a Federal Grand Jury handed down an indictment charging e-gold Ltd., Gold & Silver Reserve, Inc., and the Directors of both companies with money laundering, operating an unlicensed money transmitter business, and conspiracies to commit both offenses.

Dr. Douglas Jackson, Chairman and Founder of e-gold, speaking on behalf of his fellow Directors and both companies 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.

Dr. Jackson states, "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. During the Inquisition, accusations of witchcraft and heresy were used to sanctify torture and seizures of property. In post 9-11 America, child porn and terrorism serve as the denunciations of choice. e-gold, however, as a matter of incontrovertible fact, is the most effective of all online payment systems in detecting and interdicting abuse of its system for child pornography related payments. e-gold Ltd. 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, while billions of child porn dollars continue to flow through other (heavily regulated) payment systems. [Most members, that is, all the banks and credit card associations are utterly unable to even provide an estimate of the volume of such payments processed by their systems. eBay's PayPal subsidiary, who may have the ability to make such a determination, has refused to do so and has indicated they destroy payment records after two years.] What is worse, until August 2005 when NCMEC courageously broke ranks with US law enforcement agencies and began directly notifying e-gold of criminal sites via the CyberTipline, component agencies of the US Department of Justice purposely concealed their knowledge of child pornography abuses from e-gold's investigators, subordinating actual crime fighting to a policy agenda designed to dirty up e-gold."

In December 2005, the Secret Service (USSS) deceived a Federal
Magistrate judge with bogus testimony in order to obtain search and
seizure warrants authorizing the government to seize the US bank
accounts of Gold & Silver Reserve, Inc. The seizure, which netted the
government about $ 0.8 million, was designed to put e-gold out of
business without due process, since G&SR serves as the contractual
Operator of the e-gold system. At a subsequent emergency hearing, the
government made no effort to defend their (sealed) allegations of
lurid criminality, falling back to a position that their action was
warranted because of a licensure issue. At the hearing, G&SR described
its ongoing dialog with the Department of Treasury, initiated by
formal request of the company in Spring 2005, to determine a possible
basis for regulating the company's activities, since it was patently
clear to competent authorities that G&SR's exchange service was not
encompassed within any existing regulatory rubric [subsequently
re-confirmed by experts at the Federal Reserve]. The US Attorney for
the District of Columbia, responsible for the prosecution, was
completely unaware of this orderly proceeding, as well as Treasury
reports issued the same week that acknowledged e-gold as an innovation
not meeting definitions of a money services business or a money
transmitter.

Since this time, the government has been confronted with overwhelming
evidence that the USSS had made a horrible mistake in its attack on
the e-gold system and its repeated defamatory claims in the media that
e-gold is anonymous, untraceable, and inaccessible to US law
enforcement. They have concealed the fact that Dr. Jackson had
personally arranged to come to USSS headquarters to train the USSS
cybercrime squad in December 2004 (along with agents of the UK's
National High Tech Crime Unit, and the Australian Federal Police) on
advanced techniques, particularly in the area of efficient interaction
with e-gold's in-house investigative staff, but was prevented when
senior USSS management learned of the initiative and forbade the
training on the grounds of a policy declaring e-gold as their
designated boogey man.

The Department of Justice has had to determine whether to continue to
stand behind their component agency. Their decision to close ranks has
directly resulted in a gross misallocation of resources, with the
result that vicious criminals who might have been brought to justice
remain at large. An example of this is the Shadowcrew investigation,
hyped by the USSS as a major success in disrupting international
credit card thieves. The USSS did not subpoena records from e-gold at
any time in their investigation, or engage with e-gold's superb
in-house investigative staff, with the result that the sophisticated
hierarchy of the ring was unmolested and probably strengthened while
the USSS hauled in the low hanging fruit, "a dime a dozen and
relatively easy to track down and pop".

Similarly, there is compelling evidence that the international cartel
of commercial vendors of child pornography continues to operate
because the FBI Innocent Images Unit and Special Agents within the
Immigration and Customs Enforcement Agency have been forbidden to
follow investigative protocols developed by Dr. Jackson, apparently
for fear of further belying the party line that e-gold is itself a
nefarious operation.

With regard to allegations of money laundering, Dr. Jackson notes
"G&SR's online exchange service, OmniPay, has for years followed
stringent customer identification procedures and an absolute policy of
only accepting money payments by bank wire. If bank wires aren't
already "clean" then what is? Furthermore, e-gold Ltd. can scarcely be
construed as a money launderer since it does not accept money payments
from anyone in any form and has never owned a single dollar, yen, euro
or any other brand of legacy money. As far as the possibility of a
criminal successfully obfuscating a money trail, e-gold is a closed
system. The only way to obtain e-gold is by receiving a transfer from
someone who already has some. e-gold is also the only payment system
accessible by the public that maintains a permanent record of all
transfers."

On April 27, 2007, the government served seizure warrants on G&SR
ordering it to freeze, liquidate and turn over to the government the
operating e-gold accounts of G&SR and e-gold Ltd. The value seized,
about $762 thousand worth of e-gold from e-gold Ltd. and about $736
thousand worth of e-gold from G&SR [on top of the $0.8 million seized
from G&SR in 2005, and the approximately $1 million spent by G&SR so
far in its defense] constitutes the bulk of the liquid assets of both
companies. Perplexingly, a post-indictment restraining order states
"Nothing in the provisions of this restraining order shall be
construed as limiting the e-gold operation's ability to use its
existing funds to satisfy requests from its customers to exchange
e-gold into national currency, or its ability to sell precious metals
to accomplish the same once approval has been obtained." Having taken
virtually the entire operating funds of G&SR and e-gold Ltd., that is,
the e-gold in both companies' own e-gold accounts, it is unclear if
the government has even a basic grasp of the operations it has been
investigating for three years at a taxpayer expense in the millions.

The most remarkable element of the restraining order is that the US
government deputizes e-gold with plenipotentiary powers to act as
judge, jury and executioner against any account user e-gold itself has
deemed to be a criminal: "It is further ordered that upon receipt of
this order the defendants are required to freeze, that is, not conduct
or allow any further transactions in e-gold accounts that the e-gold
operation itself has identified as being used for criminal activity".
Although not accompanied by an outright letter of marque, this
commission (the financial equivalent to double ought status?) would
appear to be an acknowledgement that e-gold's 'Know Your Customer'
prowess far exceeds that of any regulated financial institution, who
would be obliged to rely on court orders or other legal writs to
determine if freezing an account is warranted.

Concurrent with this latest attempt to knock e-gold Ltd. and G&SR out
of business and thereby effectively deny them due process, the
government also attacked other prominent exchange services that deal
in e-gold; IceGold, The Bullion Exchange, Gitgold, Denver Gold
Exchange, AnyGoldNow, and Gold Pouch Express, plus a sophisticated and
secure alternative payment system called "1MDC". All of the listed
exchange services also follow stringent Customer Identification
Programs congruent with what would be required of a currency exchange
business, if the law supported such a classification. Two of the
services, IceGold and AnyGoldNow, are located in Europe and deal
primarily with non-US customers. As a direct and immediate result of
the seizures, these companies, all of who had built a reputation for
honoring their obligations to customers in a timely fashion, have been
disrupted, and, at least in the case of Gitgold, checks to customers
issued in fulfillment of exchanges have bounced. This is a repeat of
what happened to G&SR as a direct result of the 2005 seizure, when
over 200 checks to customers bounced and refunds had to be sorted out
with severely crippled liquidity and without a US bank account.

It must not be overlooked that the search warrant obtained by
misrepresentations before a magistrate judge in 2005 resulted in the
government helping themselves to the financial records of hundreds of
thousands of American citizens [plus citizens of virtually every other
country] who had not been accused of any wrongdoing. Since the initial
raid, the prosecutor has caused the Grand Jury to order complete dumps
of the e-gold data base on three additional occasions.

This case has nothing to do with criminal activity, at least not on
the part of e-gold Ltd., G&SR, the named individuals or these other
exchange services of high reputation. It is about a Department of
Justice that is out of control, cognizant of having made a horrible
mistake but determined at all costs to preserve its turf. In a meeting
at the US Attorney's office in Washington on December 29, 2006, a
Chief Assistant US Attorney told us that the United States knew we
weren't "bad guys" and that the United States had no interest in
sending any of us to prison or causing e-gold to go out of business.
This was in virtually the same breath as proposing that the current
defendants plead guilty to Federal felony charges.

The plain fact is that the repeated statements and actions of the
government since 2001, especially the USSS, are directly responsible
for crippling e-gold's ability to market its service to mainstream
businesses and consumers, slowing [but fortunately not stopping]
e-gold's continuous development of advanced anti-crime capabilities,
subordinating US law enforcement's cybercrime fighting efforts to the
forlorn hope of destroying e-gold, driving market share to non-US
based alternative payment systems and making the US law enforcement
community the laughingstock of competent cybercrime fighting agencies
worldwide because of its obstinate inability to back down from the
USSS's longstanding e-gold vendetta.

All inquiries should be directed to the law offices of:
http://www.fuerstlaw.com/

Posted by iang at April 30, 2007 05:08 PM | TrackBack