Kim-Kwang Raymond Choo, hi-tech crime and anti-money laundering / counter terrorism financing analyst at Australian Institute of Criminology examines this new trend.
'According to the Global Digital Currency Association (GDCA), digital currency transactions account for billions of dollars each year - digital gold currency transactions alone increased from approximately $3 billion in 2004 to approximately $10 billion in 2006. (US NDIC 2008:2).'
Another report also noted that e-gold, an electronic currency reportedly backed by gold bullion in allocated storage offered by e-gold Ltd, is one of the most established digital precious metals providers (FATF 2006). Prior to trading online, individuals establish online accounts by providing their names, email addresses and physical addresses. The required identification, however, can be easily fabricated. Some digital precious metals also allow users to establish anonymous accounts.
After establishing the accounts online, individuals can then trade their virtual holdings of precious metals with account holders (or with other accounts held by the same beneficial owner in the case of money laundering). US NDIC also pointed out that in some digital currency services, 'anonymity continues during the digital currency account funding process, again without face-to-face interaction. Individuals can fund digital currency accounts by making cash deposits directly to an exchanger’s bank account'.
Although digital precious metals exchange service can act as a broker for the digital precious metals, dealers can choose to transact directly with account holders. The selling account holder transfers ownership of the virtual precious metal holdings to the purchaser at the completion of a transaction.
The sales proceeds are received through a variety of traditional and non-traditional payment methods. For example, 'e-gold payments [reportedly] clear instantaneously (with no chargeback risk), no matter how large the payment, no matter how far apart the Spender and Recipient' (see http://www.e-gold.com/unsecure/qanda.html). Digital precious metals may also be used to purchase goods and services at participating merchants or be redeemed into physical gold.
Recent examples of digital precious metals such as e-gold being abused include the arrest of the members of the organised cybercriminal group, Shadowcrew. In October 2004, the United States Secret Service closed an illicit online website that trafficked in at least 1.5 million stolen credit and bank card numbers that resulted in losses in excess of US$4 million. Six Shadowcrew members were eventually charged with conspiracy to commit credit and bank card fraud, as well as identification document fraud.
One of the six defendants was also charged with unlawful transfer of identification to facilitate criminal conduct. Several others were also indicted on conspiracy charges. It was alleged that payments for illicit merchandise and services was paid for and received by Shadowcrew members using systems including E-Gold and Web Money. In June 2006, the alleged ringleader was sentenced 32 months imprisonment.
In another non-related case, an individual was sentenced to home confinement for nine months, order to pay a special assessment fee of US$200 and placed on five-year probation in connection with his guilty plea to money laundering and importation of steroids. It was alleged that the accused person used Western Union wire transfer, Money Grams, cash deposits and E-Gold to receive payments for his steroid sales.
The deposits were in the form of Western Union wires, Money Grams, or cash deposits. The analysis also investigated EGold accounts and found that Jones had paid over $10,000 by that method to a person in China. The analysts noted that because the records were not complete they were not able to compile exact figures, and cautioned further that there may be unknown accounts, or transactions that occurred strictly in cash without ever flowing through a bank account. In total, they found between $150,000 and $200,000 in unexplained deposits to JONES' accounts (US DoJ 2008).
From the above examples, it is clear that criminals are adept at and will continue to seek to exploit legitimate business services to facilitate money laundering and remain anonymous. In the indictment of the companies operating e-Gold and their owners, for example, it was pointed out that:
'persons seeking to use the E Gold payment system were only required to provide a valid email address to open an E Gold account and no other contact information was verified. Once an individual opened an E Gold account, he/she could fund the account using any number of exchangers, which converted national currency into E Gold. Once open and funded, account holders could access their accounts through the Internet and conduct anonymous transactions with other parties anywhere in the world (US DoJ 2007b).'
As a result it is likely that such systems will be used to facilitate money laundering and terrorist financing, perhaps with the assistance of an exchange agent such as shell corporations. On 24 April 2007, two companies operating e-Gold, a digital currency business, and their owners were indicted on charges of money laundering, conspiracy, and operating an unlicensed money transmitting business.
It was alleged that the owners of e-Gold allowed e-Gold to conduct fund transfers despite knowing that the money being moved was the result of illegal activity such as credit card and investment fraud and child exploitation (US DoJ 2007).
There are also concerns about digital precious metals providers located in countries with lax AML / CTF legislation being exploited for money laundering and other criminal activities as these services are easily accessible to anyone with an internet connection.
'Many digital currency programs in the United States believe that they are not subject to any existing federal or state regulatory structure. This issue is currently being litigated in federal court. Programs with components (servers, bank accounts, corporate offices, etc.) located outside the United States are not subject to U.S. regulations, yet those programs can be accessed within the United States. Issuers and DCEs frequently locate components in international and offshore jurisdictions; this practice enables them to avoid U.S. regulatory oversight and complicates prosecutions. (US NDIC 2008:3).'
Advances in ICT and the market demand for efficient consumer transactions have resulted in an increasing adoption of electronic payment systems including digital precious metals. Despite increased awareness of the risks associated with electronic payment systems in recent years and the recent enactment of international conventions such as the Council of Europe Convention on Cybercrime, the 'lack of adequate law enforcement authority to examine abuses in the system all make the possibility of undetected abuse by money launderers probable' (Forbes 2007:22).
Note
The views expressed in this article are those of the author alone and not the Australian Government or the Australian Institute of Criminology.
