Wired News, 03/30/2001 14:15
Secret Service Raids E-Gold
by Declan McCullagh /n/n
WASHINGTON -- The Secret Service has raided a New York state business that exchanged dollars for grams of the digital currency called e-gold.
A bevy of agents from the Secret Service, Postal Service and local police recently detained the owners of Gold-Age, based in Syracuse, and seized computers, files and documents from the fledgling firm.
U.S. Attorney Daniel French said Friday that the investigation involved charges of credit card fraud. "We haven't brought charges yet," French said. "We're in the investigative phase."
Gold-Age owner Parker Bradley says that during his eight-hour interrogation on March 12, the Secret Service seemed less interested in credit card fraud and more interested in the mechanics of e-gold. Until last year, Bradley accepted credit cards and paid out e-gold, but said he quit because too many people used stolen credit cards when conducting business with him.
"The interrogation became less about me and more about politics and e-gold," Bradley said. "They were trying to get me to blame e-gold for fraud. Just to be blunt, these guys have no clue about how e-commerce works, how e-gold works or what I was doing."
E-gold is a 5-year-old firm based on the Caribbean island of Nevis that provides an electronic currency backed by physical metal stored in vaults in London and Dubai. The company says it has 181,000 user accounts and stores about 1.4 metric tons of gold on behalf of its customers.
Bradley's Gold-Age company, which he ran with his wife out of their home until the raid, was one of about a dozen e-gold currency exchange services: He took dollars and credited grams of gold, silver, platinum and palladium to a customer's account, less a modest fee.
"I have no political statements to make," Bradley said. "I'm just running a business. People can use e-gold for whatever they desire."
Jim Ray, vice president at Omnipay -- the largest e-gold exchanger -- says he was aghast at a Secret Service raid directed at one of his competitors and customers.
"I think the case is an outrage," Ray said. "I think this is a symptom of too many donuts on the cops' part.... To me, this is a very serious business. They've just taken out one of my best market makers for no reason."
Still unclear is why the raid took place. French indicated that it could be more than a routine credit card investigation, saying "at this point, it's being investigated as a credit card fraud."
One possibility is a broader investigation directed at some users of e-gold, which is less anonymous than cash but more anonymous than credit cards. Former Treasury Secretary Lawrence Summers has warned of malcontents using the Net and encryption to dodge taxes, and it's possible that the feds don't exactly approve of a system that's more privacy-protective than the heavily regulated banking system.
Current federal regulations require banks and credit unions -- about 19,000 in all -- to inform federal law enforcement of all transactions $5,000 and above that have no "apparent lawful purpose or are not the sort in which the particular customer would normally be expected to engage."
Because e-gold is not a bank that lends money -- it's more akin to a warehouse that stores gold on behalf of its customers -- it's not covered by those rules.
Mike Godwin said the raid evokes memories of the notorious Steve Jackson Games raid by the Secret Service a decade ago, which led to the formation of the Electronic Frontier Foundation.
"Why did they take the hardware?" Godwin asks. "If what they wanted was business records, why did they take the equipment in such a way that shuts down the business?"
"These people are presumptively innocent," said Godwin, an attorney who writes frequently about law and technology. "Even if they are subjects of a federal investigation, the Secret Service should know better than to swoop in and engage in disruptive searches of people they're not ready to arrest."
Justice Department guidelines give a great deal of latitude to law enforcement officers who wish to seize computers. "Agents may obtain search warrants to seize computer hardware if the hardware is contraband, evidence or an instrumentality or fruit of crime," the guidelines say.
Bradley, who was raided, says that he's retained a lawyer and is asking that his computer equipment be returned. He said that in addition to the Secret Service seizing his business records, the raid seemed personal: They snatched his passport, birth certificate and personal checkbook.
"When it was obvious I had done nothing worng, they tried to get me and my wife -- interrogating us seperately -- to implicate e-gold," Bradley said. "They said, 'Might (e-gold) be doing this, could they be doing this?'"
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