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Reuters profiles fund manager and GATA supporter David Tice

Section: Daily Dispatches

6:51p ET Tuesday, January 3, 2006

Dear Friend of GATA and Gold:

BusinessWeek today published an investigative report
about how one particular electronic gold payment
service is alleged to have been used by criminal
organizations.

We almost surely will wait in vain for a similar
investigative report from BusinessWeek or any
other publication of the financial establishment
about how cash, bank accounts, credit cards,
brokerage firms, and investment houses have been
used by criminal organizations in schemes that
have dishonestly obtained infinitely more money
than has been dishonestly obtained through
electronic gold payment services.

No, as BusinessWeek implies, only GOLD needs to
be shut down -- precisely, we may suspect,
because it is a far greater ENEMY of all sorts
of frauds than it is their accomplice.

The BusinessWeek report is appended.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

Gold Rush: Online payment systems like e-gold Ltd.
are becoming the currency of choice for cybercrooks

By Brian Grow, with John Cady,
Susann Rutledge, and David Polek
BusinessWeek
January 9, 2006

http://yahoo.businessweek.com/magazine/content/06_02/b3966094.htm

Crime courses through the internet in ever-expanding variety.
Hackers brazenly hawk stolen bank and credit-card information.
Pornographers peddle pictures of little boys and girls. Money
launderers make illicit cash disappear in a maze of online accounts.
Diverse as they are, many of these cybercriminals have something
important in common: e-gold Ltd.

E-gold is a "digital currency." Opening an account at www.e-gold.com
takes only a few clicks of a mouse. Customers can use a false name
if they like because no one checks. With a credit card or wire
transfer, a user buys units of e-gold. Those units can then be
transferred with a few more clicks to anyone else with an e-gold
account. For the recipient, cashing out -- changing e-gold back to
regular money -- is just as convenient and often just as anonymous.

E-gold appeals to "gold bugs": people who invest in the precious
metal and believe money ought to be anchored to it. E-gold boasts
that its digital currency is backed by a stash of gold bars stored
in London and Dubai. But e-gold also appeals to savvy online crooks
who want to move money quickly and without detection. American banks
and conventional cash transmitters like Western Union are legally
required to monitor customers and report suspicious transactions to
the government. E-gold seems to go out of its way to avoid such
obligations. Its operations are in Florida, but in 2000, its
principals registered the company in the lightly regulated Caribbean
haven of Nevis.

Law enforcement officials worry that the little-known digital
currency industry is becoming the money laundering machine of choice
for cybercriminals. On the evening of Dec. 19, agents with the
Federal Bureau of Investigation and Secret Service raided the
Melbourne (Fla.) office of e-gold's parent company, Gold & Silver
Reserve Inc., and the nearby home of its founder, Douglas L.
Jackson. Agents copied documents and computer files, but so far no
charges have been brought. The Secret Service and the FBI declined
to comment on the raid. Jackson has denied any wrongdoing, though
the raid isn't the first indication that federal investigators view
e-gold as a magnet for online misdeeds. The FBI separately is
pursuing about a dozen probes in which e-gold appears as a "common
denominator," a senior agent says.

The potential danger goes beyond e-gold. Investigators say other
digital currencies are similarly used for corrupt purposes. All
told, there are at least a dozen such services worldwide, based in
places like Russia and Panama. Eight of them, including e-gold,
claim to be backed by actual bullion. As a group, these firms do
billions of dollars a year in transactions, according to Jim
Davidson, a spokesman for the Global Digital Currency Association in
New York. E-gold and its rivals make money by charging small
percentage fees on those transactions.

Most of the law enforcement interest in e-gold involves alleged
fraud and money laundering by its users. A tour of some outlaw
corners of the Internet illustrates why. One Web site called CC-
cards -- where cyberthieves sell pilfered bank account and credit-
card information -- often asks for payment via e-gold. Some sites
pushing child pornography have dropped Visa and MasterCard recently
in favor of e-gold, according to the National Center for Missing &
Exploited Children, which tracks underage porn.

But U.S. officials have another concern: that e-gold and rival
digital currencies could be used to finance terrorism. It's a notion
the companies all reject.

The man behind e-gold, Doug Jackson, is a tall, powerfully built
former oncologist. A fan of the gold standard, Jackson, 49, became a
pioneer in digital currency when he set out a decade ago to create
what he describes as a private gold-based monetary system. He
envisioned e-gold as a currency that would be accepted at Wal-Mart
while also permitting peasants from China to Peru to offer products
at stable prices. "I thought there would be this flock of e-gold
users, and I would be their messiah," he says. "It just didn't
happen."

What did happen, according to law enforcement officials, was that a
pack of felons flocked to Jackson's brainchild. Sitting in an
undecorated conference room in the Melbourne office three months
before the federal raid, he acknowledged that he had a "six-inch
pile" of subpoenas from such agencies as the FBI, the Securities &
Exchange Commission, and the U.S. Postal Inspection Service -- all
seeking information about some of his more suspect customers.
Investigators say Jackson may have begun his quirky business with
innocent intentions. But in recent years he has turned a blind eye,
the officials say, to mounting evidence that e-gold has attracted a
seamy clientele. The federal raid suggests that agents are
intensifying their focus on e-gold and its potential criminal
liability.

Jackson didn't respond to messages after the raid. But earlier, he
denied vehemently that he has looked away from crime. He said he
responds as quickly as possible to official inquiries. He
acknowledged, though, that his staff of 15 includes only one in-
house investigator who struggles to keep up with all those
subpoenas. E-gold has about 1.2 million funded accounts through
which transactions worth $1.5 billion were conducted in 2005, he
says. As for the idea that he should systematically monitor customer
identities and money flows, he argues that's not his job: "We don't
validate because we're unlike any other system."

Federal officials reluctantly confirm this loophole: E-gold and
other digital currencies don't neatly fit the definition of
financial institutions covered by existing self-monitoring rules
established under the Bank Secrecy Act and USA Patriot Act. "It's
not like it's regulated by someone else; it's not regulated," says
Mark Rasch, senior vice-president of the Internet security firm
Solutionary Inc. and former head of the Justice Dept.'s computer
crime unit. The Treasury Dept.'s Financial Crimes Enforcement
Network (FinCEN) is studying ways to close the regulatory gap.
Meanwhile, U.S. officials say e-gold and similar companies should
voluntarily do more to deter crime.

Started in 1996, e-gold was part of an early wave of Internet
payment systems that converted conventional money into a Web
currency. Most of those pioneers soon flopped, because consumers
resisted paying fees to get Web cash. Others, such as PayPal, now a
unit of online auction giant eBay Inc., evolved into credit-card
processing services.

E-gold and a handful of rivals, including one called GoldMoney, were
different. Their founders believed that tying monetary exchange to a
strict gold standard would achieve greater economic stability. The
Internet provided a ready venue for gold bugs the same way that it
offered a soapbox to adherents of every other strain of thought.
Jackson, an Army veteran and a graduate of Pennsylvania State
University's medical school, was practicing oncology in Melbourne in
the mid-1990s when he began reading about libertarianism and
monetary theory.

The married father of two adopted boys began to change his thinking.
He scoured the works of libertarian novelist and philosopher Ayn
Rand and was impressed by economist Friedrich A. Hayek's "The Road
to Serfdom," an influential 1944 condemnation of government control
of the economy. "It looked like a lot of the suffering of recent
centuries -- some of the scale of wars, some of the economic
dislocations -- could be traced back to credit cycles. And credit
cycles could be traced back to monetary manipulation" by
governments, Jackson says. "I was very moved by it."

Gold, he concluded, was the cure. The U.S. stopped tying the dollar
to a fixed amount of gold in 1971. But Jackson and a friend,
attorney Barry K. Downey, decided to start what amounted to their
own gold-backed currency. Jackson liquidated retirement accounts and
sold his medical practice to help raise an initial $900,000. A
former colleague noticed him working on computer code around the
clock at his stand-up doctor's desk. He often forgot to eat and lost
weight. Along the way, he stopped attending church. Jackson confirms
all this but stresses that he continued to provide excellent care
for his patients until he bowed out of medicine completely in 1998.

In a series of interviews with Jackson, his statements about e-gold
swing from grandiose to resigned. "We want e-gold to be recognized
as a privately issued currency and to be treated as a foreign
currency" by the U.S. and other governments, he says at one point.
But e-gold's offices don't conjure up images of a grand central
bank. Jackson, who during one interview wore neatly pressed slacks
and a yellow-striped shirt, runs his currency from a Spartan suite
on the third floor of a Bank of America building.

Online currencies are patronized by software companies and other
small businesses. Jackson says that the fees he charges customers --
for converting real money to e-gold, administering accounts, and
doing transfers -- generated about $2 million in revenue in 2005 for
e-gold's parent company, Gold & Silver Reserve, which he also
controls. The operation turns a profit, he adds, but he won't say
how much.

Mark Jeftovic considers himself a big fan of digital currencies --
but one now skeptical about e-gold. The founder of easyDNS
Technologies Inc., an Internet domain name registrar in Toronto, he
started accepting e-gold as payment in 2003. Jeftovic believes that
digital currencies will minimize the harm of government-induced
inflation. But in early 2005, investigators from the Royal Canadian
Mounted Police visited easyDNS seeking information about
cybercriminals allegedly using the registrar's services. It turned
out that some of the suspects had paid Jeftovic's company via e-
gold, he says. Angered by the police scrutiny, Jeftovic now plans to
offer rival digital currency GoldMoney in addition to e-gold. "I
like the digital currency and e-gold economy, and I want to support
it," he says. "But you have to run a cleaner shop than this."

The RCMP didn't respond to requests for comment. Jackson says he
wasn't aware of Jeftovic's concerns or the RCMP investigation. He
says that e-gold responds as quickly as possible to inquiries from
law enforcement agencies and readily provides them with user names,
account numbers, and transaction histories.

A number of gold buffs and some law enforcement officials see
GoldMoney as a reputable alternative in the digital currency field.
Based in the British Channel island of Jersey, GoldMoney is run by
James Turk, a precious metals trader and former Chase Manhattan
banker. He says that his company requires new customers to mail in
copies of identity documents and then checks the data against lists
of suspected terrorists and money launderers. The accounting giant
Deloitte & Touche annually audits its gold holdings and security
measures.

E-gold's Jackson says those steps are expensive and unnecessary.
OmniPay, an affiliate of e-gold, is one of more than a
dozen "digital currency exchange agents" that handle the conversion
of conventional currency into e-gold. Jackson says that to
authenticate users' identities, OmniPay sends them a special code
via e-mail and conventional mail. But users aren't required to prove
their identity, so it isn't clear what this accomplishes. Jackson
says that his lone in-house investigator looks for obvious fraud,
such as a customer using "China" as his only address.

Some of e-gold's customers have been unsavory. Omar Dhanani used e-
gold to launder money for the ShadowCrew, a cybercrime gang with
4,000 members worldwide, according to an October, 2004, affidavit by
a Secret Service agent. Based in a stucco house in Fountain Valley,
Calif., Dhanani used his PC to hide the money trail from the sale of
thousands of stolen identities, bank accounts, and credit-card
numbers, the government said. Accomplices sent him Western Union ()
money orders, which, for a fee, he filtered through e-gold accounts.
On Oct. 4, 2004, Dhanani, 22, who used the nickname Voleur -- French
for thief -- boasted in a chat room that he moved between $40,000
and $100,000 a week. He pled guilty in November to conspiracy to
commit fraud and faces up to five years in prison.

E-gold's Jackson says the company was never contacted by the Secret
Service regarding Dhanani and had no duty to sniff him out. E-gold's
outside attorney, Mitchell S. Fuerst, calls statements in the Secret
Service affidavit alleging that e-gold was used to facilitate
illegal activity "nonsense." Fuerst argues that the responsibility
for policing the identity and activities of e-gold account holders
lies with the banks and other regulated institutions from which
money is transferred into e-gold's system. Jackson goes further,
insisting it's impossible to launder money through e-gold -- a
contention that law enforcers say is contradicted by the Dhanani
case and others.

Jackson has made no secret of his desire to avoid U.S. government
scrutiny. In 2000, he and his partner Downey registered e-gold Ltd.
in Nevis, hoping the maneuver would add another layer of insulation
from U.S. regulation. Jackson concedes that e-gold has existed in
Nevis only as "a piece of paper." Its parent administers e-gold
services from the Melbourne office; the operation's computer servers
are in Orlando. Jackson says he chose the tiny island because
registration there is inexpensive, and the government follows well-
established British commercial law. Nevis is also known for lax
financial regulation. Referring to his desire to create legal
distance from U.S. officials, Jackson says: "There's an element of
good fences make good neighbors."

On Dec. 5, two weeks before the federal raid in Melbourne, the Nevis
Financial Services Regulation & Supervision Dept. posted a notice on
its Web site that e-gold had disseminated "misleading information"
about its legal status. Nevis officials say that the company was
removed from the island's corporate registry in July, 2003, for
failure to pay the annual registration fee of $220. Jackson didn't
respond to questions about this.

Back in the U.S., e-gold has tried to shield itself semantically,
avoiding basic banking terms such as "deposit" and "withdrawal" that
could increase its risk of being categorized as a regulated
financial institution. E-gold calls such transactions "in-exchange"
and "out-exchange." Jackson says: "It's not a desire to be tricky.
It's a desire to be accurate. It's important not to be misconstrued
as a bank."

Whatever its legal status, e-gold's usefulness to scam artists was
colorfully illustrated by E-Biz Ventures, which allegedly portrayed
itself as a Christian-influenced organization that offered investors
returns as high as 100%. E-Biz' proprietor, Donald A. English of
Midwest City, Okla., allegedly highlighted his reliance on e-gold to
appeal to victims' fear of the federal government and their desire
for anonymity. E-Biz investors opened e-gold accounts and
transferred funds to accounts controlled by English. He shifted e-
gold among more than 25,000 accounts, using new investors' money to
pay off some older ones. The scam took in $50 million before the SEC
shut it down in 2001. Investors lost $8.8 million. Later prosecuted
in federal court in Oklahoma City, English pled guilty to wire fraud
and last May was sentenced to five years in prison.

Jackson says that when subpoenaed by the SEC in the civil part of
the E-Biz case, e-gold supplied transaction data. A Jackson aide
worked closely with investigators in the civil case. "They responded
timely to every request for assistance," says Chris Condren, E-Biz'
court-appointed receiver.

Evidence of e-gold's suspect following is found on numerous Web
sites. A contributor to Cannabis Edge, a site for marijuana growers,
has provided advice on how to employ e-gold and two other digital
currencies -- WebMoney and NetPay -- to hide illicit
proceeds "beyond the reach of U.S. pigs." E-gold in particular "has
strong security," is "easy to use, and is anonymous," said the
writer, who used the name Bill Shakespeare. (Moscow-based WebMoney
and NetPay, which is based in Panama City, Panama, both deny any
wrongdoing.)

In addition to its abundant offerings of stolen financial data --
with payment frequently sought via e-gold -- the site CC-cards
carried a message in November from a hacker using the name
HellStorm. He advertised that for a 5% fee, he would set up and fund
e-gold accounts for those who are in a hurry to do business and want
to shield their identity. Users of CC-cards can make donations for
the upkeep of the site by clicking on a link that connects to an e-
gold account. (E-mails seeking comment from CC-cards and Cannabis
Edge weren't answered.)

Jackson says that he wasn't aware that e-gold was being recommended
or used on outlaw Web sites until he was so informed by
BusinessWeek. The company has since blocked the CC-cards donation
account, he says. There is little the company can do about such
situations, Jackson contends, unless law enforcement brings them to
e-gold's attention. Once informed, "we can set a value limit to
prevent an account from receiving further payments," he says. "We
can identify if there is a constellation of accounts controlled by
the same miscreant." Jackson adds: "If we get an appropriate court
order, we can monitor and assist in a sting that freezes value."

The danger of Web sites like CC-cards that are fueled in part by e-
gold became very apparent to Kimberly S. Troyer. Her identity went
up for sale there last September. Among the 22 items CC-cards put on
the block: her checking account number at Bank One (), driver's
license number, Social Security number, birth date, and mother's
maiden name. The price for all that: $30 of e-gold. Informed of the
offer by BusinessWeek in December, Troyer, a 33-year-old accounting
student at Davenport College in South Bend, Ind., is changing all of
her identity documents. She believes she escaped without losing any
money. But someone hijacked her e-Bay account and changed the
address to one in China so that it could receive payments from the
sale of iPods Troyer didn't own. "It makes me sick to my stomach,"
she says. Jackson says e-gold can't do much about such cases until
he's formally alerted by the government.

There is one crime, however, to which Jackson has reacted more
aggressively: child pornography. In August, he attended a conference
in Alexandria, Va., organized by the National Center for Missing &
Exploited Children. The center is trying to enlist banks and credit-
card companies in a crackdown on payment schemes used by child porn
Web sites. "There are fewer and fewer sites with Visa -- and more
and more with e-gold," says the center's chief executive, Ernest E.
Allen. The center has a policy of not publicly identifying child
porn sites it tracks. Jackson says he was appalled to find e-gold on
the list of institutions used by the porn sites. He provided the
center with instructions on how to seek e-gold records, and the
group says it is pleased with e-gold's cooperation.

Daniel J. Larkin, head of the FBI's Internet Crime Complaint Center,
says that in recent years, e-gold has hidden behind "a plausible-
deniability fog." Now the fog may be lifting as the subpoenas pile
up and federal agents begin to examine what they confiscated in
their Dec. 19 raid. The Internal Revenue Service is separately
auditing e-gold's parent, and Jackson says e-gold has voluntarily
agreed to cooperate with an IRS review of its procedures for
preventing money laundering. The IRS declined to comment.

Before the recent raid, Jackson said that responding to subpoenas
and other government inquiries has been distracting and expensive.
Although he emphasized that e-gold isn't obliged to monitor its
clientele, he said that he could have paid more attention to vetting
account holders were it not for the outside interruptions. He added
that he plans to switch from an account-based log-in system to a
user-based one to monitor customers more closely.

The worst-case scenario, so far undetected by officials, would be
the use of e-gold by financiers of terrorism. Experts on terrorism
funding note that digital currencies resemble the money-changing
system known as hawala, which Middle Eastern terrorists have used. A
customer gives money to a hawala service, which then telephones a
similar service in another city or country that doles out money to a
designated recipient. Many hawala outfits have been shut down since
September 11, making digital currencies a logical next step, says
Phil Williams, a professor of international affairs at the
University of Pittsburgh and consultant to the United Nations on
terrorism financing. "At some point, this is going to be used" by
terrorists, Williams says.

Jackson scoffs at this notion. "We are not bad guys, and the e-gold
system simply does not pose an undue risk for usage for terrorist
purposes," he wrote in an e-mail on Jan. 20, 2005, to AUSTRAC,
Australia's anti-money-laundering regulator, which was looking
generally into potential terrorist use of digital currency.

But e-gold attorney Fuerst said in early December that the company
quickly complied with requests in 2005 from Russian law enforcement
and the FBI for records connected to a would-be terrorist in Russia.
This person allegedly threatened to "blow something up," Fuerst
said, unless a ransom was paid into his e-gold account. The FBI and
the Russian Interior Ministry declined to comment.

This month's raid could signal serious trouble for e-gold. But
cybercrime experts predict that if the company falters, nefarious
business will simply transfer to other digital currencies,
especially ones based in countries that have lax law enforcement.
Amir Orad, executive vice-president of cybersecurity firm Cyota,
says that putting e-gold out of business "would not stop anything."

----------------------------------------------------

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----------------------------------------------------

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