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Pinning Down Online Money Laundering

ARE CRIMINALS TAKING ADVANTAGE of online currency sites to launder money? Federal law enforcement agents worry that criminals are moving from “well-established techniques for integrating dirty money into the financial system to modern innovations that exploit global payment networks as well as the Internet.”

That’s according to the Money Laundering Threat Assessment report from a federal working group that looked into the question. The working group was composed of law enforcement representatives from the United States Postal Service, the departments of Treasury, Justice, and Homeland Security, and the Board of Governors of the Federal Reserve System. Private sector financial experts were also part of the team.

The government report notes with some alarm the rise in popularity of online payment services that can accept funds in different ways, including cash and money orders. “The result is that some service providers pose a greater risk for money laundering,” it says.

With this type of transaction, a person wishing to send money from the United States to another country sends money (and a transaction fee) to an intermediate known as an exchange broker; this broker then trades the money to an online currency service provider for an “e-metal” such as gold or silver.

On the other end of the transaction, the value of the e-metal can be transferred instantly to the person overseas. This process avoids high fees associated with credit cards and can similarly bypass losses typically incurred from currency exchange.

Mark Herpel, who publishes the Gold Pages Directory, a resource guide to online currencies, says that the problem arises because these exchange agents are not now considered “financial institutions” in most countries. Consequently, they are excluded from some federal scrutiny—at least for now.

“I know that Australia recently required all exchange agents to register as financial agents and be government licensed,” he says. “They all shut down or moved to other jurisdictions” as a result.

Herpel says that almost all of the major online currency players are located outside the United States and asks, “How would the U.S. impose [its] laws and regulations on these foreign companies?”

The task-force notes the same issue. “Most jurisdictions, including the U.S., have not established a licensing or regulatory framework for online payment systems with no physical presence in the jurisdiction,” the report observes. That means they don’t have to comply with established anti-money-laundering (AML) best practices.

“It’s something that’s of interest to the Secret Service,” says Larry Johnson, special agent in charge, Criminal Investigative Division of the Secret Service. “We are investigating some of the electronic [services].” Johnson adds that the Secret Service is in discussions with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to change the way that exchange brokers are classified under the law.

But some experts note that the industry is trying to address these risks. Chris Choate, an associate with global criminal defense firm McNabb Associates, says he’s seen the high-profile online currency organizations taking proactive steps to prevent their services from being abused, such as conducting investigations on people opening accounts.

They have also established the Global Digital Currency Association (GDCA), which ranks member businesses “on four levels of security and trustworthiness,” Choate says. “They’re really trying for self-regulation, because they don’t want governments telling them what to do,” Choate explains.

Herpel notes that most of these exchange agents “already employ some version of AML” rules to help them build legitimacy, and that some overseas online currency providers force U.S. users to comply with rules that meet AML standards. These rules, however, are not always in effect for users based in other countries.

Not all services strive for legitimacy. The report finds that “some online payment services are ill-equipped to verify customer identification, and some openly promote anonymous payments.”

The study refers to several investigations; one in 2004 regarding a Ponzi scheme, and an ongoing investigation into a ring using stolen credit card information to acquire prepaid cards from digital currency accounts. And late last year, federal agents conducted a 36-hour investigation of computer systems at e-gold, Ltd., one of the major players in online currencies.

According to a statement by e-gold’s CEO, Douglas Jackson, no charges were filed as a result of the investigation, however. Jackson says that on “more than 300 occasions,” the company has assisted federal investigators by providing “information regarding individuals it believed to be lawbreakers,” and that government “officials have gone so far as to commend us in writing for our efforts in complying with their requests and aiding them in their investigations.”

Choate says that concern over widespread money laundering or the abuse of online currencies by other criminals or terrorists seems to be “more hype than reality,” and that the government is concerned because it’s new, easy to use, and has the potential for anonymity. He says that apart from the few investigations mentioned in the government’s report, he’s not aware of any larger problem. “Maybe there’s some smoke but not necessarily any fire,” he says.