Internet Businesses Beware: Aggressive Enforcement of Money Laundering Laws Targets Online Payment Systems

E-Gold Criminal Indictment Resolved in a Plea Agreement

E-Gold, an online cross-border payment system that styled itself an “alternative global payment system” allowed customers to set up accounts with nothing more than a valid email address, and with no verification of identity. Without compromising anonymity, customers were able to (1) fund accounts using online and store-front exchangers to convert currency or instruments into “e-gold,” (2) transfer money to sellers accepting e-gold, and (3) redeem e-gold into currency or instruments. The Department of Justice (DOJ) determined this made the site a favored method of payment for sellers of financial scams, child pornography, credit card fraud, and identity fraud. Perhaps also driving the case for enforcement, E-Gold not only facilitated anonymity, but actively touted the anonymity of the service.

The company and three executives were indicted in April of 2007 and pleaded guilty last week in Washington, D.C. to criminal money laundering and to operating as an unlicensed money transmitting business. Under the plea agreement, E-Gold must register with federal and applicable state authorities as a “money transmitter.” The company must also implement a comprehensive anti-money laundering program, including a customer identification program consistent with its status as a “financial institution” that is a money transmitter. These plea agreements highlight that payment service providers must be aware of the special money laundering risks associated with their businesses, and adopt and implement internal controls reasonably designed to manage those risks.

Plea Agreements Allow E-Gold to Continue to Operate, But With Significant Constraints

E-Gold’s three senior executives face substantial fines and jail time for their roles in E-Gold’s operation. Dr. Douglas Jackson, E-Gold founder and current CEO, pleaded guilty to conspiracy to engage in money laundering and to operating an unlicensed money transmitting business, resulting in a federal sentencing guideline range of 12 to 18 months and a possible $750,000 fine. Reid Jackson and Barry Downey pleaded guilty to operating a money transmitting business without a state license, and each face a D.C. guideline range of 6 to 24 months probation, imprisonment, or a combination of both, and a $25,000 fine. E-Gold faces fines in the millions of dollars along with an agreed $1.75 million forfeiture.

Under the plea, E-Gold will be permitted to continue to operate subject to some significant constraints. E-Gold has agreed to register with the Financial Crimes Enforcement Network (FinCEN) and with any state requiring separate licensing. E-Gold has also committed to implementing an anti-money laundering program, including customer verification, suspicious activity reporting, blocking of transactions involving Specially Designated Nationals, special employee training, and independent audits among other safeguards, in light of its status as a financial institution.

Financial Institutions Are Responsible for Managing the Money Laundering Risks of Their Products

Although money transmitters are not traditional financial institutions, the Bank Secrecy Act (BSA) and the USA PATRIOT Act define the term financial institution broadly to include all of the usual suspects (banks, credit unions, broker-dealers) along with more surprising bedfellows including: dealers in precious metals, stones, or jewels; pawnbrokers; travel agencies; sellers of cars, planes, boats and other vehicles; people engaged in real estate closings and settlements; and money transmitters, among others. Money transmitters are defined as any person “engaged as a business in the transfer of funds.” Whether a company constitutes a money transmitter is decided based on the facts and circumstances of the business’s activities, therefore enforcement involves a risk-based assessment. As a practical consequence, any company that transfers funds and potentially facilitates money laundering could fall under this definition and be subject to federal anti-money laundering laws.

In the case of E-Gold, it is not clear what will be required as part of its customer identification program. Also unclear is whether the identity verification requirement extends past the facial requirements of 31 C.F.R. § 103.125 in this case (because § 103.125(d)(1)(i)(A) refers to customer identification, but only to the “extent applicable to the money services business,” and unlike banks, broker-dealers, and some other specific groups, no particular customer identification procedure is outlined other than as may be necessary in connection with currency transaction reporting.)

The E-Gold prosecution makes it clear that the DOJ is willing to prosecute businesses aggressively under the anti-money laundering laws, whether these businesses operate online or offline, when a risk of money-laundering is created by a company’s service offerings. D.C. U.S. Attorney Jeffrey Taylor observed: “Because of the successful prosecution of these defendants, digital currency providers everywhere are now on notice that they must comply with federal banking laws or they will be subject to prosecution.” DOJ Press Release, July 21, 2008. While the precise metrics for “compliance” remain a grey issue, the safest course for online payment systems will be to take a hard look at how their operations help or hinder broader money laundering activity, and to implement programs in advance of enforcement, especially programs that address customer identification and verification. 

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O'Melveny & Myers LLP has extensive experience with Bank Secrecy Act and money laundering issues, including experience from prior senior government enforcement officials. We welcome your comments and questions on these important developments. Please contact Steve Bunnell at (202) 383-5321, Bill Satchell at (202) 383-5342, or Michelle Koch at (202) 383-5391 for additional information.

Steve Bunnell is a partner in the D.C. office specializing in global enforcement and white collar criminal defense matters. Steve was formerly Chief of the Criminal Division in the U.S. Attorney's Office for the District of Columbia, where he supervised numerous criminal cases involving money laundering and the Bank Secrecy Act. Bill Satchell is a partner in the D.C. office and counsels firms in the financial services area in connection with transactional, litigation, and regulatory matters. Michelle Koch is a first year associate in the D.C. office and Harvard Law School graduate, focused on white collar criminal defense and anti-trust matters.


This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Stevan E. Bunnell, an O'Melveny partner licensed to practice law in the District of Columbia, Bill Satchell, an O'Melveny partner licensed to practice law in the District of Columbia, and Michelle J. Koch, an O'Melveny associate who is not yet admitted, have contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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