Speed, surprise and strategy

Money is transferable by one brief telephone call/e-mail or fax. It is therefore vital that not only is any investigation/analysis conducted in utmost secrecy but action is taken before the launderer has an inkling that he is being investigated.

Accordingly, at the very earliest opportunity, an analysis should be carried out to assess whether there has been any fraud and if so, the extent.

Once the problem has been assessed, decisions need to be taken as to whether it is commercially sensible to pursue the launderer and if so, to what extent. No victim, however large or small, should fail to assess the significance of publicity, given the fact that it has been the victim of fraud which is often caused by inadequate security measures or lack of judgment.

On the other hand, Directors are now facing increasing responsibilities to safeguard and preserve companies assets.

The Turnbull Report describes the ability of a company to respond appropriately to significant business risks to ensure its effective and efficient operation as an element of a sound internal control system. This includes safeguarding assets from inappropriate use or from loss and fraud and ensuring that liabilities are identified and managed.

The internal control system should be capable of responding quickly to evolving risks to the business arising from factors within the company and should include procedures for reporting immediately to appropriate levels of management any significant control failings or weaknesses.

The recommendations of the Turnbull Report do not have the force of statute. A company that does not implement those recommendations will not necessarily be liable to its shareholders for losses that may result from a failure to deal with risks. The Turnbull Report states that responsibility for implementing the guidelines lies with the board of directors and although they can delegate the task, they can’t delegate the responsibility.

However, the directors of the company owe it duties of trust and to act in its best interests. If a director fails to take reasonable steps to fulfil those duties, then he may be liable to the company for any resulting losses. The director of a company may also assume this kind of liability by virtue of his service contract with the company.

The Turnbull guidelines may therefore in the future provide guidelines for what constitute reasonable steps for a director of a company to take. If the board fails to follow the guidelines, it may be said that the directors have acted negligently. They may therefore be personally liable to reimburse the company for any resulting loss.

Under current law, if a director fails to prevent or report a fraud he has breached his duty to exercise care and skill. This duty is owed to the company. The director owes the company the same standard of care which a reasonable person would exercise on his own behalf. The test is objective.

The standard of skill required from a director is that which could be reasonably expected from a director with his degree of knowledge and experience. This is a subjective test. In this sense the director may well be negligent in failing to take steps to prevent fraudulent activities.

This is a clear example of how a director may be held liable to the company for failure to take reasonable steps to prevent loss to the company. There is no reason why the same argument could not be applied to the director who fails to implement internal control procedures to prevent misappropriation of company proprietary information by a computer hacker through failure to implement security measures.


Reference:
http://www.antimoneylaundering.ukf.net/papers/solicitor.htm

In a tactic as old as banking itself, criminals have always used banks as a sure-fire way to launder money gained through illegal means. But with the advent of internet banking, "following the money" to locate and prosecute money launderers and criminals has become more difficult than ever.
 
Money laundering, which involves disguising the origins of illegally obtained cash and then transforming it into apparently legitimate investments, is bolstered by the near anonymity that can sometimes be achieved through internet communication.



"A potential risk exists at any stage of the contact between a new customer and financial institution," says a report issued Thursday by the Financial Action Task Force (FATF).  But, the group says, in the case of internet banking, the difficulties "are increased if the procedures for opening [accounts] are permitted to take place without face-to-face contact..."


International access
 
FATF, set up by the G7 group of major industrialised nations, also noted that worldwide access further complicates detection of fraud.
It is not always clear whether an account is accessed from a country other to where the money is held, and account managers may simple be too busy to monitor all the activity of individual account holders.
 
Gambling with illegal cash
 
It isn't just online banks that are vulnerable. Internet-based gambling operations can also act as a haven for illegal cash-washing operations.
The FATF said there is evidence that criminals are using online casinos to commit crimes and launder the proceeds.
Aside from the problems inherent in internet banking, online casinos further complicate tracking of questionable transactions because gambling records are software based and at the gambling site - often located offshore.
That makes evidence gathering more difficult because the records are harder to find and may not exist at all.
 
Combatting cyber crime
 
In issuing its report, the FATF said countries could take several measures to counter money laundering. They include:

• Requiring internet service providers to maintain accurate and thorough subscriber information
• Require the establishment of log files, showing access and telephone number identity
• Ensure that information is made available internationally

The report on the potential of internet fraud coincided with one on the progress that the G7 has made to counter countries harbouring money-laundering schemes, among them Israel, Panama and the Bahamas.
In June, members of the G7 group of industrialised nations published a list of countries that made money laundering easy, and threatened tough action and sanctions if their governments failed to join international efforts to crack down on the criminals.






Source:
http://news.bbc.co.uk/2/hi/business/1149984.stm

Money launderers can now move illicit cash through the growing number of virtual reality role-playing games, and convert that cash into real currency before withdrawing it from ATMs worldwide. One wonders just how many laundrymen have tumbled to this cyberlaundering opportunity. Compliance officers at financial institutions please note that their banks may be guilty of money laundering if it facilitates deposits or payments in these virtual worlds, for there is no functional due diligence on players or recipients.

• Require ISPs to maintain reliable subscriber registers with appropriate identification information.
• Require ISPs to establish log files with traffic data relating Internet-protocol (IP) number to subscriber and to telephone number used in the connection.
• Require that this information be maintained for a reasonable period (possibly 6 to 12 months)
• Ensure that this information may be made available internationally in a timely manner when conducting criminal investigations.

• Unusual requests, timing of transactions or e-mail formats.
• Anomalies in the types, volumes or values of transactions.
• A customer who submits an incomplete on-line account application and then refuses to respond to a request for more information.
• An on-line account application with conflicting information such as a physical address that does not match the location of the given e-mail address.
• On-line applications for multiple accounts with no apparent reason to do so.
• A customer who uses the bank’s on-line transaction services to send repeated inter-bank wire transfers between several accounts with no apparent reason to do so.

Here we are going to discuss about how the Amendments to the Bank Secrecy Act of 1970, commonly referred to as the Money Laundering Control Act of 1986, apply to cyberspace and cyberlaundering. Without delving into the actual techniques involved in using public keys, blind signatures or any other encryption or decryption device, the best way to explain how anonymous digital cash could benefit money launderers' is by example. The following example will be used to demonstrate the law's application.
Doug Drug Dealer is the CEO of an ongoing narcotics corporation. Doug has rooms filled with hard currency which is the profits from his illegal enterprise. This currency needs to enter into the legitimate, mainstream economy so that Doug can either purchase needed supplies and employees, purchase real or personal property or even draw interest on these ill-gotten gains. Of course, this could be accomplished without a bank account, but efficiency demands legality. Anyhow, Doug employs Linda Launderer to wash this dirty money. Linda hires couriers ("smurfs") to deposit funds under different names in amounts between $7500 and $8500 at branches of every bank in certain cities. This operation is repeated twice a week for as long as is required. In the meantime, Linda Launderer has been transferring these same funds from each branch, making withdrawals only once a week, and depositing the money with Internet banks that accept ecash. To be safe, Linda has these transfers limited to a maximum of $8200 each. Once the hard currency has been converted into digital ecash, the illegally earned money has become virtually untraceable; anonymous. Doug Drug Dealer now has access to legitimate electronic cash.
Doug Drug Dealer is, of course, likely to be found guilty of more than just participating in a money laundering scheme. However, how the law applies to Linda Launderer and the Internet banks is more confusing. The purpose of the 1986 Act was to specifically criminalize the structuring of transactions so as to avoid the reporting requirements. Linda and her army of couriers are almost certainly violating structuring regulations by depositing small amounts in regular bank accounts. The problem is how to apply current money laundering law to cyberlaundering.
In the scenario above, Linda Launderer transfers sums of money less than $10,000 from non-Internet bank accounts to Internet-based ecash accounts. If the Internet bank is FDIC insured, as Mark Twain Bank then federal depository regulations may apply. However, the cyberbank will not automatically be required to file a CTR regarding these transactions as all are under the $10,000 filing requirement. Nevertheless, if any employee of the Internet bank has even a suspicion of structuring, a CTR may be filed. As in the tangible banking world, the information contained on a CTR is only as insightful as the information presented by the bank conducting the prior transaction.In essence, each record in the chain of transfers is only as strong as the previous recordation.
The catch is that Linda Launderer's transfer was deposited into an ecash account. According to one cyberbank which currently accepts ecash, ecash accounts are not FDIC insured. A lack of federal insurance protection is understandable for the reason that digital money is currently created by private vendors, rather than the Federal Reserve. Thus, digital cash does not enter into the marketplace of hard currency thereby affecting monetary supply or policy, yet.
Since Linda Launderer's transfer was deposited into a non-FDIC insured, and thus, presumably non-federally regulated account, then there should be no mandatory compliance with the filing regulations contained within the Money Laundering Control Act of 1986. If these assumptions prove correct, whether digital money is anonymous or not will be of less relevance to money launderers and law enforcement. If certain cyberbanks, or even specific non-FDIC currency accounts within a cyberbank are able to operate outside the reach of current federal regulations, laundering on the Web may become one of the most rapidly expanding growth industries. It should be remembered that a criminal organization desires to clean its dirty money, not necessarily protect their deposits from institutional banking failures.
Once the ecash account has been established, digital funds can be accessed from any computer that is properly connected to the Intenet. A truly creative, if not paranoid, launderer could access funds via telnet. Telnet is a basic command that involves the protocol for connecting to another computer on the Internet.Thus, Linda Launderer could transfer illegally earned funds from her laptop on the Pacific Island of Vanuatu, telneting to her account leased from any unknowing Internet Service Provider in the United States and have her leased Internet account actually call the bank to transfer the funds, thus concealing her true identity. This would, of course, leave an even longer trail for law enforcement to follow. Anyhow, ecash, being completely anonymous, allows the account holder total privacy to make Internet transactions. Thus, the bank holding the digital cash, as well as any seller which accepts ecash, has virtually no means of identifying the purchaser. Therefore, the combination of anonymous ecash and the availability of telnet may give a launderer enough of a head start to evade law enforcement, for the moment.
In the world of earth and soil, money can be laundered by the purchase of real and personal property. However, any cash transaction over $10,000 is subject to a transaction filing requirement. Real estate agents and automobile dealers, to name a few, are prime targets for the deposit of large sums of cash. In fact, such agents and dealers have been indicted for allowing drug money to be used to purchase expensive property.51
On the Internet, anonymous ecash would allow for anonymous purchases of real and personal property. This fact yields at least two separate, but interrelated problems. First, the launderer or drug dealer will be able to discretely use illegally obtained profits to legitimately purchase property. However, currently, the opportunity to spend thousands of dollars of digital money, or ecash for that matter, on the Internet is virtually nonexistent. Second, the temptation for automobile and real property dealers to become players in the game for anonymous ecash seems overwhelming. If a seller or dealer understands that it can not possibly trace who spent ecash at its establishment, the fear of becoming involved with dirty money is drastically reduced.Under current law, a seller of property must file a CTR for any cash transaction over $10,000. If the purchaser's identity is anonymous, and even the bank can not trace the spent ecash, the force of the Money Laundering Control Act of 1986 is withered into mere words on a page. Of course, Congress could attempt to legislate in this new area of commerce.
Obviously, transferring hard currency to ecash and then spending the ecash is an appealing opportunity to potential launderers'. What if the ecash is then transferred back to a regular hard currency account? This may seem a foolish act as the entire purpose is to reap the benefits of anonymous ecash. However, presently, there are no opportunities to purchase automobiles or real property by the exclusive use of anonymous ecash. Thus, the desire to convert private and untraceable ecash into a more functional means of purchasing is understandable.
Whether a regular, non-Internet currency account already exists or must be created to deposit the transferred ecash into may be irrelevant. Filing a CTR would be a legal necessity if the transfer amount is over the $10,000 reporting limit, as the transfer will deposit hard currency in a tangible, institutionalized, and regulated bank account. A transfer from completely anonymous ecash to hard currency might alert law enforcement as to the existence of the ecash account. While this alone would not track down laundered money, it might put a suspicious agent on notice.
In summary, Linda Launderer has knowingly structured financial transactions so as to avoid reporting requirements. Under current law she is in violation of The Money Laundering Control Act of 1986. However, if the cyberbanks in which she has ecash deposits are outside the reach of current banking regulations, these banks have no duty to file any currency transaction reports. Nevertheless, assuming that cyberbanks which accept anonymous ecash are somehow subject to the same laws and regulations which financial institutions in the tangible world are, Linda must first be caught before she can be found guilty. This is where anonymous ecash may save Linda from fines and jail time. Even if cyberbanks are required to file transactional reports pertaining to ecash, the reports will be virtually useless, as the banks have no knowledge as to which funds are Linda's. Thus, Linda, our overly creative launderer, and Doug, our devious drug dealer, may enjoy the benefits of completely anonymous money laundering. That is, unless Congress decides to attempt legislation in the area of digital money and virtual banking, or FinCen is somehow granted the constitutional authority to secretly monitor all cyberbanking transactions, despite its lack of accountability to the general population.



Reference:
http://osaka.law.miami.edu/~froomkin/seminar/papers/bortner.htm

Money laundering involves three stages to turn dirty money into clean money:
1. Electronic money
Electronic money (or e-money) is money that is represented digitally and can be exchanged by means of smart card from one party to another without the need for an intermediary. It is anticipated that e-money will work just like paper money. One of its potential key features is anonymity.

The proceeds of crime that are in the form of e-money could therefore be used, for example, to buy foreign currency and high value goods to be resold. E-money may therefore be used to place dirty money without having to smuggle cash or conduct face to face transactions.
2. Layering
Once the dirty money has been placed, the money launderer works it through a complex series of transactions to separate it from its illegal origins. This process is known as layering. It may involve the transfer of money through a series of offshore companies or the purchase of goods for re-sale. The launderer may try to legitimise the money by laundering it through a solicitor’s client account or by paying tax on it as purported income from a business!

It is the layering stage where the use of the Internet is most likely to facilitate money laundering. If the procedures for opening an Internet bank account are permitted to take place without face to face contact or without a link to a pre-existing traditional bank account, where the customer has to produce documentary evidence of identity, a money launderer may find it easier to set up accounts in false names that cannot be traced back to him.

The money launderer can control transactions from his PC. He can transfer money virtually instantaneously and thereby build up an extensive audit trail in a short space of time. The transfers can be made through many jurisdictions making it harder for prosecutors from one jurisdiction to follow the audit trail.

With the Internet there is the added jurisdictional issue of where the transaction takes place. Does it take place where the launderer is located, where the server is located or where the accounts are held? A joint report last year by the Bank of France and the French Banking Commission suggested that the last of these three locations is where the transaction takes place.

Layering may also become easier if the money can be transferred between banks that deal with e-money. Then the anonymity features of some types of e-money may make the source virtually untraceable.
3. Integration
Finally the money needs to be used by the owner, ensuring that the owner’s consequent wealth appears legitimate. This process is known as integration. A common traditional technique is to raise false invoices for goods and services.

The owner could use a company that provides Internet services to make it appear that services are being provided in return for the payment of monies that have passed through the layering process. For example, the laundered money may be in a bank account held in the name of a fictitious person or shell company. Payment would be made from that account to the Internet service company, as purported payment for a service. The service may be an Internet casino or betting facility. However the service would never be delivered – there would be no (net) winnings paid back to the account. The payment would appear as profit in the books of the Internet service company. Thus the wealth of the owner would appear to be legitimate – the profit of his Internet company.

This has greater scope than the traditional provision of goods and services where to legitimise the false invoicing may involve extensive paperwork such as documents evidencing delivery of goods and purchase of raw materials. Services may also be restricted to a particular geographical area. It may therefore be harder to justify a substantial turnover. It may also raise suspicions if money is being transferred from overseas banks or substantial amounts are being transferred through a few banks in the vicinity of the company’s operation.

On the other hand, Internet services tend to have lower overheads that needed to be accounted for and need not be limited geographically.


Reference:
http://www.antimoneylaundering.ukf.net/papers/solicitor.htm

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

SUBPOENA CENTRAL
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 (WMT ) 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. (EBAY ), 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."

INTELLECTUAL CONVERSION
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 (BAC ) 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 (FDC ) 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.

"GOOD FENCES"
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 (JPM ), 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.

TERROR TOOL?
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."



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

To be or not to be... anonymous digital cash! That is the question! The battle that emerges is between the right to privacy by means of anonymous digital cash verses the desire of law enforcement to ferret out crime. The fact of complete anonymity guarantees that some money laundering will be easier to pull off. On the other hand, the lack of anonymity means that every move made on the Internet will be traceable. Thus, whether money laundering becomes rampant under the guise of anonymous ecash may be one of the first tests of the practical aspects of DigiCash's future. Any discussion of privacy rights would be woefully incomplete without mentioning the famous privacy article published by Samuel Warren and Louis Brandeis in 1890. This article, barely a century after the Constitutional Convention, professed that the "right to be let alone" was of the utmost importance. Almost two hundred years after the Constitution was initially ratified, the Supreme Court defined the scope of privacy for an individual's financial information in two landmark decisions.
In California Bankers Association v. Schultz, the Court held that bank record keeping requirements do not violate the Fourth Amendment right to privacy and do not amount to an illegal search and seizure.In United States v. Miller, the Court held that a criminal defendant had no Fourth Amendment right to protection of his bank records, and did not have a legitimate expectation of privacy regarding these papers.
Concluding over two centuries of Constitutional erosion, it is apparent that an individual's right to financial privacy is limited. The issue involving cyberspace is whether financial privacy rights are so limited that the federal government could monitor a digital cash user's financial transactions in a detailed fashion. In effect, rendering completely anonymous digital cash completely pointless.
While the Supreme Court has sliced financial privacy rights on several, previously mentioned, occasions, Congress has attempted to restore financial and informational privacy rights to the individual. The Privacy Act of 1974, The Right to Financial Privacy Act of 1982, and The Electronic Communications Privacy Act of 1986 are currently the three best hopes for individual financial privacy.
First, The Privacy Act of 1974 regulates the practices of federal agencies regarding personal information. With certain exceptions, no federal agency may disclose any record contained in its system to any other person or agency without the written request or consent of the individual.
Next, The Right to Financial Privacy Act of 1982 ("RFPA") attempted to further protect financial records.Under RFPA, in order to obtain a customer's financial records from a financial institution, the federal government must serve a subpoena on the customer before or concurrently with service on the bank. The government must show that the records are related to a "legitimate law enforcement inquiry," and notify the customer that it can take steps to block the bank's disclosure of the records.
Finally, The Electronic Communications Privacy Act of 1986 ("ECPA") attempts to protect the individual against the unauthorized interception of electronic communications. Title I focuses on the interception of wire, oral and electronic communications. Title II prohibits an electronic communications service provider from knowingly divulging the contents of a communication while in electronic storage.
Applying current law to the Internet, the result is inadequate protection of individual financial privacy. The combination of The Privacy Act and RFPA prevent the government from groundless searches of individual financial records. However, the standard required for a search is only that there exist some evidence that the records are related to a "legitimate law enforcement inquiry." Due to this relaxed standard, individual financial privacy may be violated without any probable cause. A "legitimate law enforcement inquiry" is clearly an easier requirement to meet than a Fourth Amendment probable cause standard.
Expanding into cyberspace, if the Internet falls under the protection of the ECPA, as it is an electronic communication, then individual financial privacy in cyberspace is afforded as little protection as financial privacy in the tangible world. Essentially, the government need only claim that it requires access to financial records due to a "legitimate law enforcement inquiry."
Taking one step further, the application of current financial privacy laws to DigiCash's Ecash may be the eulogy for completely anonymous digital cash. If the government believes that ecash is overflowing with money launderers, a "legitimate law enforcement inquiry" into the situation would likely allow access to ecash account records. Since even the bank can not trace ecash to a user, pressure would be placed on various agencies to solve the problem.
First, the Federal Reserve would likely announce that all cyberbanks accepting anonymous ecash conform with FDIC regulations. Thus, these banks would be subject to federal scrutiny and pressured into insuring anonymous ecash deposits. Since insuring anonymous ecash might prove unprofitable, it is probable that many timid cyberbanks will succumb to federal intimidation and abandon anonymous ecash altogether.
Second, cyberbanks could be convinced to implement special "investigatory software" into their computer systems so as to flag suspicious ecash accounts. While the technical aspects of such a system are beyond the scope of this article, it is fair to say that if such programming is both possible and practical, then no ecash account would be safe from the "legitimate law enforcement inquiring" software.
Finally, if ecash accounts become subject to greater scrutiny, the IRS and FinCen will capitalize on the additional information being unearthed. Since there is no requirement of probable cause to search an individual's financial account, the IRS and FinCen could use the preliminary information obtained from the "legitimate law enforcement inquiry" so as to have sufficient facts to establish probable cause, enabling a full scale search and seizure of an individual's financial records.



Reference:
http://osaka.law.miami.edu/~froomkin/seminar/papers/bortner.htm

An appropriate place to begin a study of the US statutes regarding money laundering would be in the United States Code. The appropriate legal codes relating to money laundering include Title 18 U.S.C. 1956, enacted in 1986, and Title 18 U.S.C.1957. However, the history of US legislation begins with the Bank Secrecy Act of 1970(BSA) This act is considered to be one of the initial legislative measures against money laundering in the US. Primarily targeted at tax fraud related activities, this act was also designed to create a paper trail for large currency transactions (Currency Transaction Report). Noncompliance could result in criminal and civil penalties. Under this act casinos among other groups were defined as financial institutions and subsequently had to report cash transactions over the $10,000 limit. Tribal casinos were not included in this act at this time. In addition to the CTR requirements, the act specifies that a report of international transportation of Currency and Monetary Instruments (CMIR) must be made for physical transportation of monies and similar instruments out of the US if the aggregate total exceeds the same $10,000 limit.
This act was upheld first in 1974 against a 4th amendment challenge in California Bankers Association v. Schultz, 416 U.S. 21. Then again in 1978 against a 1st amendment challenge in U.S. v. Fitzgibbon, 576 F.2d 279 (10th Cir.), cert. den. 439 U.S. 910 (1978). Finally, a 5th amendment challenge against this act was defeated in 1980 with U.S. v. Dichne, 612 F.2d 632 (2d Cir), cert. den. 445 U.S. 928 (1980). Following the Bank Secrecy Act of 1970, the next major piece of legislation was the Money Laundering Control Act of 1986(MLCA). This act officially made money laundering a crime. It created three offenses, which included:

1. Knowingly helping launder money from criminal activity.
2. Knowingly engaging (including by being willfully blind) in a transaction of more than $10,000 that involves property from criminal activity.
3. Structuring transactions to avoid Bank Secrecy Act (BSA) reporting.

In 1988, the Anti-Drug Abuse Act allowed law enforcement the authority to seize assets that were involved in attempts to launder money or commit currency/banking crimes. It also required strict reporting rules for cash purchases of financial instruments, authorized the Treasury to require financial institutions to submit Geographically targeted reports (sometimes referred to as GTO’s Geographically Targeted Operations of the Treasury), directed the Treasury to negotiate international information sharing agreements, and increased the criminal sanctions for tax evasion relating to money laundering crimes.
In 1990 section 2532 of the Crime Control Act of 1990 set the stage for later calls for cooperation and sharing of information related to tax data and currency transfers. First, this act gave the Office of the Comptroller of the Currency (OCC) the authority to request assistance of a foreign banking authority in conducting and investigation, examination or enforcement action. Second, this gave the OCC the power to accommodate similar request in the reverse. The purpose of these exchanges is to allow the investigating body the opportunity to determine if a person has, is or will violate any banking or currency transaction laws or regulations.
The Crime Control Act was supplemented a year later by the FDIC Corporation Improvement Act. Section 206 of The Federal Deposit Insurance Corporation Improvement Act (FDICIA) allowed the OCC to disclose to foreign bank regulators or supervisory authorities information that the OCC may discover.
Then in 1992, the Housing and Community Development Act, Annunzio-Wylie Anti-Money Laundering Act, ave regulators the power to close or seize institutions found guilty of money laundering activities. It also permitted the treasury to require financial institutions and their employees to report suspicious transactions relevant to possible violation of law or regulation. Plus it required financial institutions to adopt anti-money laundering programs. Furthermore, it amended the original BSA to define structuring activities as illegal money laundering activities. Structuring, sometimes referred to as smurfing, occurs when a reportable transaction report is avoided by breaking cash denominations down into fragments that do not exceed the $10,000 threshold.
In what is sometimes viewed as a streamlining initiative and other times considered a loosening of money laundering legislation, the Money Laundering Suppression Act of 1994 aimed to reduce and consolidate Currency Transaction Reports(CTR) to one destination. It further required certain “money transmitting businesses” to register with the Treasury. This act also redefined financial institutions to include tribal casinos, which were previously not covered under the BSA. Canada Money laundering initiatives were not as substantial in Canada as early as the American efforts. However, in 1989 the Proceeds of Crime Act (Bill C-61) made up some ground by criminalizing money laundering activities. This act allowed for the seizure of property or profit resulting from drug or non-drug related crimes. Similar to the BSA act of the US and subsequent amendments this act required the filing of cash transaction reports for amounts of $10,000 or more. Later in 1993, the Seized Property Management Act was instituted to create a mechanism for sharing seized assets amongst the provinces as opposed to the seized items defaulting to the federal government.
Finally, in 2000, the Proceeds of Crime Money Laundering Act (Bill C-22) updated and replaced the earlier C-61 PCMLA from 1989. It created the Financial Transactions and Reports Analysis Center of Canada (FinTrac) to receive transaction reports and analyze international financial movements through cross border currency reporting requirements. Some of the goals of this new act included the following:

• Provide vital tools for law enforcement
• Strike a balance between privacy rights and law enforcement needs
• Minimize compliance costs for financial intermediaries
• Contribute to international efforts to combat money laundering

Source:
http://softduit.com/mavenmappersinformation/cyberlaundering-low-tech-meets-high-tech/016/

In the beginning, laundering money was a physical effort. The art of concealing the existence, the illegal source, or illegal application of income, and then disguising that income to make it appear legitimate required that the launderer have the means to physically transport the hard cash. The trick was, and still is, to avoid attracting unwanted attention, thus alerting the Internal Revenue Service (IRS) and other government agencies  involved in searching out ill-gotten gains.
In what could be described as the "lo-tech" world of money laundering, the process of cleaning "dirty money" was limited by the creative ability to manipulate the physical world. Other than flying cash out of one country and depositing it in a foreign bank with less stringent banking laws, bribing a bank teller, or discretely purchasing real or personal property, the classic approach was for a "smurf" to deposit cash at a bank. Essentially, platoons of couriers assaulted the lobbies of banks throughout the United States with deposits under the $10,000 reporting limit as required under the Bank Secrecy Act. The result was the formation of a serious loophole under the Bank Secrecy Act, allowing couriers almost limitless variables in depositing dirty money such as the number of banks, the number of branch offices, the number of teller stations at one branch office, the number of instruments purchased, the number of accounts at each bank, and the number of persons depositing the money.
In 1986, the Money Laundering Control Act (the Act) attempted to close the loopholes in the prior law that allowed for the structuring of transactions to flourish. In criminalizing the structuring of transactions to avoid reporting requirements, Congress attempted to "hit criminals right where they bruise: in the pocketbook."
Under the Act, the filing of a currency transaction report (CTR) is required even if a bank employee "has knowledge" of any attempted structuring. Thus, it appeared as if the ability to launder the profits from illegal activity would be severely hampered.
As the physical world of money laundering began to erode, the tendency to use electronic transfers to avoid detection gained a loyal following. Electronic transfers of funds are known as wire transfers. Wire transfer systems allow criminal organizations, as well as legitimate businesses and individual banking customers, to enjoy a swift and nearly risk free conduit for moving money between countries. Considering that an estimated 700,000 wire transfers occur daily in the United States, moving well over $2 trillion, illicit wire transfers are easily hidden. Federal agencies estimate that as much as $300 billion is laundered annually, worldwide. As the mountain of stored, computerized information regarding these transfers reaches for the virtual stars above, the ability to successfully launder increases as the workload of investigators increases.
Although wire transfers currently provide only limited information regarding the parties involved, the growing trend is for greater detail to be recorded. If the privacy of wire transfers is compromised, due to burdensomely detailed record keeping regulations, electronic surveillance of transfers, or other potentially invasionary tactics, then the leap from the physical to the virtual world will be nearly complete. If laundering is to survive it must expand its approach, entering the world of cyberspace.
While change is often a frighteningly awkward experience, for an enterprising criminal operation, that wishes to remain open for business, it is a necessity. As the above mentioned race through laundering history demonstrates, creativity, and not necessarily greed, has been the launderer's salvation. The recent explosion of Internet access,may be the new type of detergent which allows for cleaner laundry.

Reference:
http://osaka.law.miami.edu/~froomkin/seminar/papers/bortner.htm

A number of concerns pervade the impending changeover from legacy currencies to the Euro. Amongst these is the great potential for organised crime to profiteer through money laundering and counterfeiting. There will be many opportunities for these organisations to launder vast quantities of cash with little prospect of detection during the biggest currency changeover since the introduction of the US dollar.

The value of the largest Euro note is such that it will allow greater sums to be transferred across borders without detection by the more traditional methods. The 500 Euro bill, which is the largest denomination of the Euro, will be worth around £300. This is nearly 17 times the value of the largest denomination note in Greece (10,000 drachma note).

Europol have warned that the average brief case will be able to hold the equivalent of £4.4 million in Euro notes compared to £670,000 in sterling. This will clearly make placement of ‘dirty’ cash a far easier task for money launderers. Indeed the Portuguese have refused to issue the 500 Euro note for fear of the ease with which large sums of illegally gained cash could be moved around.

Europol also have information to indicate that because of the ease with which the Euro can be moved around and the accessibility it provides to other areas of Europe, organised criminals are intending to use the Euro in favour of the US dollar.

Large sums of ‘dirty’ cash currently hoarded by criminal organisations will be exchanged for ‘clean’ Euro notes. Banks will be so overwhelmed with the volume of business that these types of transactions may well go unnoticed, further it is suggested that even if suspicious transactions are noticed authorities will not have the resources to follow them up.

The Federal Finance Ministry in Germany have warned that the police and customs have information to the effect that large amounts of cash resulting from criminal activities has been gathered in Europe with the intention of using the changeover day for laundering these sums.

There will be a large number of transactions which will involve customer accounts being changed from legacy currencies to Euros. This will again provide an opportunity for illegal transactions to go undetected. There will be thousands of large transactions of this nature providing the perfect cover for money launderers and fraudsters. Maria Jose Morgado, Deputy Director of the Economic and Financial Crime Unit in Portugal stated that the changeover would make it more difficult to trace suspect transactions. Ms Jose Morgado also commented that the trans-national nature of the Euro means that in the future large sums of money will be moved around Europe with no need for conversion. This will make it easier for launderers to hide the origin of ‘dirty’ cash. For example, although Euro coins will show the face of each head of state depending on the country, there will be no such marking on Euro notes.

The Secretary- General of the European Banking Federation commented that where bank staff are dealing with one transaction per minute “you cannot preclude that somebody who in a normal period you would spot slips through the net.”

Layering may also become easier if the money can be exchanged through on-line banks. The anonymity features of this type of transaction may make the source virtually untraceable.

The fact that anyone can change money into Euros in any bank, whether they hold an account or not, adds another anonymity feature to the process and another method which can and will be exploited by organised crime. Europol thinks that the Mafia, Latin American drug cartels and Asian criminal groups will all be active during the changeover


Reference:
http://www.antimoneylaundering.ukf.net/papers/solicitor.htm