U.S. Law Enforcers Are Cold on Gold

  Thus far it has not been a good year for providers of "digital gold" currencies and payment services that claim to enable consumers to buy and sell products and services using shares of precious metals instead of U.S. dollars and other national currencies. A spate of negative consumer press and government reports has called the payment systems, at best, lax on financial crime prevention.
  "Digital currency dealers," as many in the industry call themselves, claim to sell shares of such precious metals as gold, silver and platinum kept in vaults in various parts of the world. Owners of those shares can hold them as savings or investments, or they can transfer shares as payment to other parties who own shares through the same company.
  Another option is to transfer precious-metal value to accounts owned by third-party companies that claim to convert the value to U.S. dollars or other national currencies and load the funds onto prepaid cards. That would enable consumers to use the funds to make purchases with standard currency or to withdraw cash at ATMs.
  Proponents say precious-metal payment systems could allow corporate business partners and consumers to avoid the instability of some national currencies. Eventually, they hope, wider merchant acceptance would lessen the need to convert precious-metal value back into national currencies for payments. The advantage to merchants, proponents say, is that they potentially could avoid chargeback and credit card interchange expenses by accepting guaranteed payments supported by precious metals.
  Skeptics, though, charge that efforts to create currency based on the value of metals seem designed to skirt standard banking and money-transfer rules while providing few consumer protections and inadequate checks of account-holder identities. They also point to the high fees typically charged by third-party companies that support prepaid card programs and that exchange gold value for traditional currencies.
  "If the bank goes bankrupt, the U.S. government backs that up," says Robert Montmorra, chief of the FBI's asset forfeiture and anti-money laundering unit. "I guess my issue here is, why would you risk your earnings with gold unless you were trying to circumvent the system?"
  Precious-metals providers and related exchange services look like money-services businesses to Patrice Motz, of counsel with the Washington, D.C., office of Bryan Cave. She wonders whether many payment companies are really exchanging dollars for shares in gold or are just moving dollars around.
  "If some people want to actually own gold and not have it in the home, that's legitimate," Motz says. "But with a lot of people, that's not what's happening. It's just a guise for operating a money-services business."
  Douglas Jackson, founder of a gold and silver reserve called e-gold Ltd., and its Internet payment affiliate OmniPay, says he worked with the U.S. Treasury Department for several months to determine how the companies should comply with Bank Secrecy Act regulations. Jackson asserts that e-gold should be registered as a currency exchange that works with a private currency not issued by any nation. "E-gold is like a foreign currency," Jackson says.
  But in December, federal agents searched Jackson's home and the Melbourne, Fla., office of e-gold and OmniPay, and they froze the U.S. bank accounts of Gold & Silver Reserve Inc., the two companies' parent incorporated in Delaware. Jackson says e-gold is still operating with its non-U.S. accounts while appealing the American seizures in court.
  Legitimacy Issues
  One accounting oversight could not have helped his case. E-gold's account user agreements posted on its Web site in March say the company is registered as a Nevis, West Indies, corporation. But the Nevis Ministry of Finance in December posted on its Web site a warning that e-gold's registration was revoked for nonpayment of fees and urged that anyone "proposing to do business with e-gold Limited should exercise extreme caution."
  Jackson says he is correcting the error. "We learned about that from the [Nevis] Web site," he says. "E-gold's registered agent in Nevis died in 2002, so he stopped sending invoices to the company and we never noticed we weren't getting billed."
  James Turk, founder of GoldMoney, another precious-metals account provider based in the British Channel Island of Jersey, says he started pondering a gold-based investment and payment system when he was a Chase Manhattan banker in Thailand in the mid-1970s. U.S. inflation had followed President Nixon's removal of the U.S. dollar from the gold standard in 1971, and when the German Herstatt Bank failed in 1974, it created worldwide ripples, including in Thailand. Turk believed private currency systems tied to the value of precious metals would provide stability, but no tool existed to transfer such value.
  Today GoldMoney has patented a payment chain based on electronically transferring ownership of shares in gold and silver. Turk says GoldMoney owns more than $90 million worth of the metals stored in a vault in London. The vault, which is owned and operated by Via Mat International, holds the precious metals of several tenants, including GoldMoney. Lloyd's of London insures the metals, Deloitte & Touche audits the holdings, and the London Bullion Marketing Association monitors the purity and transport of gold from the refiner to the vault, Turk says.
  Transfers directly from one GoldMoney account to another cost paying account holders 1% of the transfer's value up to a maximum of 100 mils of gold, which translates to about $1 for a $100 transaction, Turk says. The fees top out at the equivalent of $1.70, so a $500 transaction and a $500,000 transaction would both cost $1.70. Instead of paying interchange, an approved merchant accepting the transaction earns a few cents, and the rest of the fee goes to GoldMoney.
  So far, most of GoldMoney's customers save their gold or use it to transact with other precious metals investment and payment services, Turk says. But he hopes GoldMoney someday will enable a broader variety of payments, beginning with corporations electronically transferring gold shares between countries instead of sending bank wires and paying currency-conversion fees.
  System Vulnerable
  In December, a group of U.S. government agencies, including the Financial Crimes Enforcement Network and the Office of Foreign Assets Control, reported the money-laundering vulnerabilities of several payment tenders, including cash and credit cards and such newer forms as gift cards, PayPal and precious-metal currencies.
  "U.S. federal law-enforcement agencies have found that some online payment services are ill-equipped to verify customer identification, and some openly promote anonymous payments," the report says, paying particular attention to metal-backed currencies.
  Turk says GoldMoney requires new-account applicants to send copies of their photo IDs, then mails activation codes to street and e-mail addresses and takes other steps to minimize the chances of identity theft and fraud. They fund their accounts via the Federal Reserve's automated clearing house system and its equivalent in other countries.
  Logo No-Nos?
  But Turk admits it is difficult to control the actions of many online prepaid card vendors, which advertise online gambling and international dating services on their Web sites and say they convert gold-account payments to dollar value. They even display GoldMoney's logo without Turk's permission.
  Many of prepaid card vendors' Web sites also display MasterCard International's Maestro and Cirrus logos and note that their cards can withdraw up to $5,000 per day or $150,000 per month from the networks' ATMs and payment terminals deployed worldwide, though experts doubt the claims.
  Several such sites include the spelling mistakes, outrageous claims and lack of contact information often seen in phishing attacks, which lure unsuspecting consumers to fraudulent Web sites that ask for personal data, such as Social Security numbers and bank-account PINs. Many also say only that "a Canadian bank" issues their cards.
  One card reseller whose Web site provides clearer account terms and easy company contact information is Rocky Spencer, owner of Marroc Corp., a Virginia business that sells the IGE Card and displays the Maestro and Cirrus logos on its www.igecard.com Web site. "Unlimited Internet Gold & E-Currencies Maestro Debit Card-$19.95," the site reads. "It's a prepaid, reloadable card that isn't linked to your bank account."
  Spencer suggests the card's use as a gift card, travel card or cash card that can withdraw up to $150,000 per month from ATMs on MasterCard's networks. "Some people will just load it as a convenient way to pay people overseas," Spencer says, but adds "I won't ship where there's a lot of fraud."
  Turk says to legally use the GoldMoney logo, a merchant must first open a merchant account. He says Spencer began the process but did not finish it.
  Spencer, though, says he just wanted to let customers know he is willing to accept GoldMoney but does not want to provide Turk with personal information to open the account until there is a business reason for taking that risk. "On the Internet, you really don't know who you're doing business with," he says. "I haven't had the need to use that account because I haven't had one GoldMoney customer."
  MasterCard says it does not have a record of a prepaid program involving IGE and Toronto-based CardOne Plus. CardOne confirms that it manages the IGE Card but will not comment further.
  A director at North York Community Credit Union, the Toronto issuer of the cards, says IGE Cards are not prepaid but standard debit cards that hold funds in individual cardholder accounts. He says under Cirrus rules in Canada, MasterCard does not need records of CardOne Plus and IGE. A MasterCard spokesperson says the matter is under investigation and that its logos cannot be used without MasterCard's consent.
  Enforcement Issues
  Spencer says CardOne Plus and North York follow banking and anti-terrorism regulations, and he would have no qualms about being regulated as a money-services business in the United States. "I don't like the new regulations any more than anyone else because it's more work, but after 9/11 we have to be more careful."
  Motz agrees that U.S. regulations must be clarified for new stored-value and payment tools, whether they transact in dollars, precious metals or other currencies. Then those laws should be enforced.
  "I'm not saying they're illegitimate," Motz says. "But if they are selling services to people in the United States, it seems to me they should be subjecting themselves to the laws of the United States."
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