U.S. seeks forfeiture against digital-money firm

By Brett Wolf

ST. LOUIS, June 7 (Thomson Reuters Accelus) – The U.S. Justice Department is seeking the forfeiture of nearly $9 million in accounts at e-gold Ltd, a pioneering online digital currency company which pleaded guilty in 2008 to money-laundering charges.

The department’s action is its latest step in trying to rein in abuses by digital-currency businesses, some of which are proving a headache for authorities due to their ability to hide user identities.

As part of a process for winding down e-gold, account holders who want to retrieve their money will have to disclose their identities and face government scrutiny.

The Justice Department’s plea deal with e-gold and a subsequent agreement signed in 2010 required the firm to identify any customer accounts that contained funds traceable to criminal activity.

The department said that e-gold has since “fully cooperated and has identified a long list of e-metal accounts containing funds traceable to criminal offenses including child pornography, credit-card fraud, identity theft, investment fraud and the sale of stolen or nonexistent goods on the Internet.”

The department filed a civil complaint in Maryland last Friday seeking the forfeiture. The e-gold funds which prosecutors have sought to forfeit are held in 609 accounts, estimated to be worth $8.6 million.

Roughly $19 million held in e-gold accounts was forfeited in the 2008 case. In those proceedings, e-gold founder Douglas Jackson also pleaded guilty to charges of money laundering. Senior executives Barry Downey and Reid Jackson pleaded guilty to operating an unlicensed money-transfer business, as did Douglas Jackson.

“E-gold is a classic example of an emerging payments system that was well ahead of its time and not fully prepared for what was to come: criminal abuse,” said attorney Carol Van Cleef of Patton Boggs LLP, who was retained by e-gold after the criminal cases.

“Many who enter into the emerging payments arena have excellent intentions. Unfortunately, the criminal element is often a step ahead of legitimate consumers in their adoption,” Van Cleef told Thomson Reuters.

 

RETURNING FUNDS

She said e-gold was pleased that the government was moving forward with its forfeiture action, and described it as the beginning of a two-part process that would allow funds to be returned to legitimate e-gold customers. About $80 million would remain for distribution to legitimate customers once the Justice Department had taken the illicit proceeds, she said.

The judge in the e-gold criminal case had ordered that about $300,000 of the previously forfeited money be used to help the company to obtain the state licenses it needed to operate legally.

Van Cleef said that this effort had ultimately been unsuccessful because of state laws which prohibited convicted criminals from operating money transmitters. As a result, she began helping to wind down the 15-year-old company, which was one of the first issuers of digital currency.

According to court documents, the use of “e-gold,” which was purportedly backed by precious metals, involved four steps: opening an account; converting national currency into e-gold to fund the account; using e-gold to buy or sell a good or service or to transfer funds to another person; and changing the e-gold back into national currency.

One of the Justice Department’s primary criticisms of e-gold was that it let customers to engage in transactions under pseudonyms. The only piece of information e-gold verified was the e-mail address used to open the account.

Those hoping to reclaim money in e-gold accounts must complete a full identification process, Van Cleef said. Account holders’ names would be submitted to the government, which would conduct a review that would include screening against the Office of Foreign Assets Control’s sanctions list. Account funds would then be returned where appropriate.

(Editing by Randall Mikkelsen)

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete (http://accelus.thomsonreuters.com/solutions/regulatory-intelligence/compliance-complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)