Pt. 3 of 3 – Understanding This Comment: “Anyone Using E-gold Can End Up In Jail”

This is the final piece in a three part series. Part 1 and Part 2 are available.

Where do we go from here?

What do the next few years hold for e-gold Ltd and all of the assorted HYIP scams? Will there be huge growth as in the past two years or will a changing business environment cause their closure? Will new laws and regulations in the United States cause a digital currency melt down, slow down or a massive expansion?

These are all tough questions. In order to survive in the rapidly changing business environment of the Internet, I feel that all online companies will at some point in their life go through a major series of changes. Certainly if your company is online for ten straight years, you are going to experience some major growing pains.

Trying to predict where your customer base may grow and how future regulations may zap your business is very common in this new digital world. It should come as no surprise that e-gold and other digital currencies may have to soon adapt to changing regulations. However, it is impossible to know the future so here is a good guess……

Chris seems to think that e-gold has rolled over and is giving up information on anyone and anything so they can just stay in business. I disagree, that is too much drama and again, its tough to see life through these dark shades.

I know e-gold as one of the greatest systems of global electronic commerce ever invented. I’d hate to see anything happen to their business. However, one cannot ignore the problems created by the ever present HYIP scams. These online schemes, have been a big problem in past years and the number of operations seems to have grown exponentially over just the past two years. I could list about a dozen big HYIP frauds, off the top of my head, which have previously cleared tens of millions in unethical if not illegal proceeds for their operators then simply disappeared.

Was it e-gold’s responsibility to police how their currency was used in past years? Is it their responsibility today?

It would appear that in today’s financial world, the Know Your Customer (KYC) rule is omnipresent and required for any US financial transaction. From vending machine operators to PayPal, I can’t find a logical reason why any US based financial operation would be exempt from the ’spirit’ of the current US laws.

Over past years there also seems to be some questions as to whether e-gold may be liable for the losses from scam victims. If $20 million dollars went missing through e-gold accounts because of an HYIP operation, who was responsible at the time for knowing or preventing that kind of fraud? Surely not e-gold, the actual currency operator, it was not their responsibility because the law did not require them to ‘oversee’ each account.

Perhaps they were unknowingly complicit and now could be liable for ‘victim’ damages? Did they facilitate the online financial transactions that led to the losses? This seems like a real legal stretch and would seem impossible to prove, until you take a closer look at this case from 2002.

In 2001 and 2002, David Reed (from the US), through a company called One Groupe International (OSGold) ran a massive online ponzi scheme. OSGold ‘investors’ (victims) said in US court documents that it was “fronted by the sale of a nonexistent gold-backed Internet currency and was fueled by a mammoth ‘Ponzi’ scheme disguised as a guaranteed high-yield investment program,” OSGold investors banded together and sued David Reed and 19 other defendants including two Latvian banks that allegedly were tied into the scam. (Lateko & Parex) In total the victim’s losses from this scam are reported to be around $250 million USD, but the exact tally can never be known. Whether higher or lower, its just a guess. From this lawsuit, a US Judge ruled that the bank WAS responsible because of their ‘hands on’ participation.

U.S. District Judge Lewis Kaplan ruled on Friday that the lawsuit could proceed against the Latvian Economic Commercial Bank (Lateko), which had attempted to dismiss the charges. Kaplan, in New York, dismissed some charges against Lateko, including breach of fiduciary duty, but permitted the rest to stand. “Lateko’s apparently false denials to a possibly important business partner and its continued cooperation with (Reed and other defendants) even after the scheme suspiciously began to collapse tend to show conscious disregard or recklessness and give rise to a strong inference of fraudulent intent,” Kaplan wrote. Lateko’s involvement began in December 2001, when it allegedly inked a deal with Reed and other defendants to provide anonymous debit cards that could be used to withdraw money from OSGold accounts from ATMs linked to the Cirrus network. (reference 1,2,3,4).

Its important to note the e-gold was not involved with this case:

In May 2001, the Gold and Silver Reserve (responsible for the e-gold currency) announced it would no longer link to companies that did business with “or make reference to” OSGold. *1

I am only showing this comparison to demonstrate that even if you are an unwitting / unknowing participant or just in denial about your involvement — but still involved, a US judge may find your actions DO make you liable for victim losses. As I have previously written, in an HYIP scam operation using e-gold digital currency, e-gold makes money on the transactions (fees), the exchange agents make money and the scam operators clean up from fraudulent profits. None of these participants can truly say 100%, “I was not involved in this operation”. Of course I could be wrong.

Where is the logical argument that e-gold will have to change their future business to comply with financial regulations in the US?

If you follow this logic, it becomes pretty obvious that it is NOW their responsibility to know who is using their digital money. Follow me here…if you are in the US and receive a Western Union transfer for over $700, picking up your legal cash not only do you have to provide ID, but they also now require one hand of fingerprints! So, to stop terrorist funding, WU will take your prints, ID, signature, current address, phone and video tape the entire transaction for anything $700 and up.

If a ‘person to person’ WU transfer of just $750 now requires fingerprints, does it seem proper or logical that a few minutes later that same person can go to his PC and privately transfer $7000 in e-gold with no verification of his identity? Does that seem to keep with the spirit of the law to prevent terror financing? Does this sound proper, “let’s track all Western Union transactions of only $700 or more but ANYTHING e-gold transfers is off our books and we don’t care?” Hmmm…

I enjoy the freedom, but I don’t think that this size and type of easy financial transfer is within the spirit of current US law. For the record, if e-gold was OUTSIDE THE US, all of this discussion becomes a moot point. Were the servers and offices located in the Isles or Panama–pretty much anywhere outside of the US (even Canada) all of this information would be even more of a waste of time than it already is….

However, the e-gold servers and business are located within the US borders (Florida) and as so, subject to US regulations. This kind of financial freedom in the US cannot last, e-gold must soon change and better start to know their customers. If they wish to stay in business, I don’t see any getting around this point. PayPal did it years ago and now thrives, e-gold can also do it and survive. The business environment is rapidly changing and e-gold better keep up.

So how do they proceed to ‘watch’ how their currency is used? Do they follow GoldMoney’s model and require all account holders to ‘verify’ themselves? Perhaps, but GoldMoney is not a US operation, they do some things to combat bad money but don’t fully comply with the MSB regs.

Should e-gold become a money service business and follow those regulations? Most would say no, e-gold does not actually transact any money funds with any client….are they supposed to act as a money service business when they don’t fit the ‘guidelines’?

How would any future changes take place, what would ‘get fixed’ first?

(1 Will e-gold institute a PayPal or GoldMoney type KYC rule?
(2 Will all exchange agents in the US be required to do the same?
(3 Should the US parties responsible for the money to gold currency transactions be required by US law to now become MSB licensed and reporting?

If you answered ‘Yes’ to ALL of the above questions you are probably most correct. Any digital currency business in the US, handling money transactions for the public, may now have to now start complying with MSB regulations. If all coin operated laundry businesses are required under the Patriot Act to report their cash flow, you can bet your ass that exchange agents should also be doing it regardless if they are asked to do so or not. This seems to be a logical next move for the US. Why?

In September of 2004, the Australian government began to require all exchange agents to hold an Australian Financial Services license (AFSL). Almost all of larger Australian based exchange agents closed or moved out of the country, due to the Australian Securities and Investments Commission (ASIC) licensing requirement.

In fact today eForexGold is the only fully licensed exchange agent in Australia and they have a virtual monopoly on local transactions. They have even teamed up to sell products through the Australian post office. From their web:

Deposit at any post office using the deposit card. It is quick, easy and hassle-free. The deposit cards allow you to make deposits at any Post Office in Australia. The procedure is exactly the same as paying bills: you hand over cash to the postal worker; he or she scans the barcode on the card and gives you the receipt. After that you only need to e-mail us with the deposit details and tell us which account you want us to fund. These deposit cards are available at www.e-forexgold.com for free. Please note, such deposit cards are available in Australia only.

Is the end near for the ‘exchange agent’ business due to future US regulations?

No, but changes are coming soon. Its very possible and almost certain, that agents will soon see new US regulations encompassing both e-gold and all US ‘exchange agents’.

Will that cut into the digital gold currency business?

Not likely, almost all of the large agents are located outside of the US jurisdiction and their bank accounts are also outside the US.

I prefer to look at it this way….any future regulation of US exchange agents or digital currency requiring them to become licensed could result in the merging of exchange agents with existing MSBs. This should result in the massive growth of e-gold exchange operations in the US.

Imagine for one moment if you fully explained to any check cashing franchise the lucrative day to day operations of an e-gold exchange agent. I mean spend a day with the guy in front of the PC and show him the large percentage profits one can make on an exchange from fiat to digital gold currency, with less risk than cashing a bad local check. IMHO, regulation of any size towards exchange agents will simply result in ‘good PR’ for the DGC business and massive growth from merged operations.

One example is obvious from Australia 2004, the smaller more private agents shut down or left the country for greener pastures. However, the largest in Australia, eForexGold which is legally licensed, now sells digital currency from the Australian post office. Its too lucrative a market to leave and to easy to partner with an existing licensed financial operator.

In fact partnerships with existing licensed money agents has already begun in the US, and if any regulatory changes are now in the works this may quickly become the norm for exchange agents during this year (2007).

From the eForexGold web site: A New Exciting Affiliate opportunity is here! Our Australian customers are familiar with our deposit cards, which allow to make payments at any post office in that country. We are now ready to introduce the same service to other countries. We are seeking agents who will help us to distribute the deposit cards and the POS/cash terminals manufactured specifically to accept our cards. The system is completely operations and will work in any country. The Money Transfer Agent will practically act as our representative in his city or country and receive commission payments for the transfers performed via his agency. The complete information and the inquiry form will appear on our site, the affiliates page, this week. Stay tuned.