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Q: money laundering concerns associated with being an online "market maker" ( Answered 5 out of 5 stars,   3 Comments )
Subject: money laundering concerns associated with being an online "market maker"
Category: Relationships and Society > Law
Asked by: unclejimbo9-ga
List Price: $75.00
Posted: 26 Dec 2005 22:10 PST
Expires: 25 Jan 2006 22:10 PST
Question ID: 610023
What precautions does a company like have to take to avoid
money laundering concerns or to avoid transacting with people that are
associated with terrorists? It would be great to run a site similar to but the risks seem tremendous, and I'd like an idea of how
much effort it takes to cover your back.

Also if there are other obvious legal concerns I would like to know about those.

Subject: Re: money laundering concerns associated with being an online "market maker"
Answered By: wonko-ga on 14 Jan 2006 12:06 PST
Rated:5 out of 5 stars
According to my research, it is not clear that is legally
required to take any actions to avoid money laundering concerns or
avoid transactions with people who are associated with terrorists. 
Digital currencies are increasingly a concern for US regulators
because of money laundering and terrorism issues, particularly because
there is a dearth of regulations in this area.

Recent articles in BusinessWeek magazine on e-gold and other digital
currencies highlight the current state of the law.  Market makers in
digital currencies are operating with an unclear legal status.  At the
present time, it appears they do not meet the definition of a
financial institution required for current money laundering
regulations to apply.  However, this does not mean that state and
federal regulators cannot create a lot of problems for these
companies. For this reason, most are choosing to avoid US regulators
by registering offshore and/or maintaining their operations offshore. 
Note that's market-making and currency exchange services are
operated by a subsidiary in Hong Kong.  Although they engage in
transactions with banks, digital currency purveyors are careful to
avoid using terminology that would lead them to being classified as

PayPal has experienced regulatory issues as well, although it provides
additional bank-like services that does not.  However, it was
still successful in avoiding being regulated as a bank. In 2002,
regulators in four states sought to classify PayPal as an unlicensed
banking operation.  Although they were not successful in having PayPal
be regulated by the FDIC, PayPal is regulated as a money transfer
provider by the states and by the Federal Reserve under Regulation E. 
Other regulations, including that Patriot Act, also apply. However,
PayPal provides many services not provided by, such as a money
market fund, accounts where cash deposits can be left, and ATM and
debit card withdrawals. merely buys and sells virtual
currencies, so it is not necessarily a money transfer provider, which
would subject it to these regulations.  Instead, it is more akin to
e-gold by providing people with a means of monetizing their virtual

Based on these articles, it appears that if the usage of such services
rises to significant amounts and/or there is significant evidence of
illegal activity being undertaken using the services, regulators will
do whatever they can to investigate/harass services with a presence in
the United States through raids and subpoenas to disrupt operations
and stop illegal activity.  Putting forth at least some effort to
voluntarily cooperate with banking and money laundering regulations,
like GoldMoney does, would appear to be smart, particularly if one is
seeking to locate in the United States.  However, full compliance can
be quite burdensome; competent legal advice would certainly be

The following sources provide considerable information on the subject
that I believe you will find useful.




"Gold Rush" BusinessWeek (January 9, 2006)

"American banks and conventional cash transmitters like Western Union
are legally required to monitor customers and report suspicious
transactions to the government. E-gold seems to go out of its way to
avoid such obligations. Its operations are in Florida, but in 2000,
its principals registered the company in the lightly regulated
Caribbean haven of Nevis."

"Federal officials reluctantly confirm this loophole: E-gold and other
digital currencies don't neatly fit the definition of financial
institutions covered by existing self-monitoring rules established
under the Bank Secrecy Act and USA Patriot Act. "It's not like it's
regulated by someone else; it's not regulated," says Mark Rasch,
senior vice-president of the Internet security firm Solutionary Inc.
and former head of the Justice Dept.'s computer crime unit. The
Treasury Dept.'s Financial Crimes Enforcement Network (FinCEN) is
studying ways to close the regulatory gap."

"Fuerst [e-gold's outside lawyer] argues that the responsibility for
policing the identity and activities of e-gold account holders lies
with the banks and other regulated institutions from which money is
transferred into e-gold's system."

"Jackson has made no secret of his desire to avoid U.S. government
scrutiny. In 2000, he and his partner Downey registered e-gold Ltd. in
Nevis, hoping the maneuver would add another layer of insulation from
U.S. regulation. Jackson concedes that e-gold has existed in Nevis
only as "a piece of paper." Its parent administers e-gold services
from the Melbourne office; the operation's computer servers are in
Orlando. Jackson says he chose the tiny island because registration
there is inexpensive, and the government follows well-established
British commercial law. Nevis is also known for lax financial
regulation. Referring to his desire to create legal distance from U.S.
officials, Jackson says: "There's an element of good fences make good
"Back in the U.S., e-gold has tried to shield itself semantically,
avoiding basic banking terms such as "deposit" and "withdrawal" that
could increase its risk of being categorized as a regulated financial
institution. E-gold calls such transactions "in-exchange" and
"out-exchange." Jackson says: "It's not a desire to be tricky. It's a
desire to be accurate. It's important not to be misconstrued as a

"A number of gold buffs and some law enforcement officials see
GoldMoney as a reputable alternative in the digital currency field.
Based in the British Channel island of Jersey, GoldMoney is run by
James Turk, a precious metals trader and former Chase Manhattan
banker. He says that his company requires new customers to mail in
copies of identity documents and then checks the data against lists of
suspected terrorists and money launderers. The accounting giant
Deloitte & Touche annually audits its gold holdings and security

"The Internal Revenue Service is separately auditing e-gold's parent,
and Jackson says e-gold has voluntarily agreed to cooperate with an
IRS review of its procedures for preventing money laundering."

"The worst-case scenario, so far undetected by officials, would be the
use of e-gold by financiers of terrorism. Experts on terrorism funding
note that digital currencies resemble the money-changing system known
as hawala, which Middle Eastern terrorists have used. A customer gives
money to a hawala service, which then telephones a similar service in
another city or country that doles out money to a designated
recipient. Many hawala outfits have been shut down since September 11,
making digital currencies a logical next step, says Phil Williams, a
professor of international affairs at the University of Pittsburgh and
consultant to the United Nations on terrorism financing. "At some
point, this is going to be used" by terrorists, Williams says."

"WebMoney and Its Customers" BusinessWeek (January 9, 2006)

"Why PayPal Might Not Pay Off" by Robert Barker, BusinessWeek
(February 4, 2002)

"Its lengthy, eye-glazing user agreement says explicitly that it is
not a bank, but to regulators in four states, PayPal looks
suspiciously like an unlicensed banking operation. They are
questioning PayPal's practice of opening accounts from which its users
can leave cash, have it swept into a PayPal money-market fund, or
withdraw it via ATM and debit cards."

"Is Paypal Your Pal?" by Amy Phillips, Brainwash (Sep 18, 2005)

"While Paypal is not a bank and thus can't be regulated by the FDIC,
it is regulated by the Federal Reserve under Regulation E and by each
state government as a money transfer provider. Under the PATRIOT Act,
money laundering statutes, and anti-fraud laws, Paypal is required to
prove to the Department of Justice that it is taking affirmative steps
to prevent people from using Paypal to break the law."

"Our Business" (2005)

"The Company's market making and currency exchange services are
operated by Internet Gaming Entertainment, Ltd., the Company's
wholly-owned subsidiary in Hong Kong."
unclejimbo9-ga rated this answer:5 out of 5 stars
Thanks! That was very useful.

Subject: Re: money laundering concerns associated with being an online "market maker"
From: murunbuchstansinger-ga on 27 Dec 2005 12:33 PST
It's about due diligence. Depends on which countries you wish to
operate in. Speak to the financial regulatory authorities of the
countries with whom you wish to do trade.
Subject: Re: money laundering concerns associated with being an online "market maker"
From: unclejimbo9-ga on 27 Dec 2005 16:28 PST
In this case I only want to operate inside the U.S. So the question to
the Researchers then becomes "what do I need to do to stay out of
trouble in the U.S. (on a venture that is ideally perfectly legitimate
but would be at risk of dealing with unsavory characters if we were
Subject: Re: money laundering concerns associated with being an online "market maker"
From: nicknak-ga on 28 Dec 2005 23:04 PST
I registered just to try to answer this - what a fun question! - but
no new researchers.  Any-o, This is a really interesting question that
would require a lot of research for anyone to answer well - especially
considering that the subject is so new, and evolving at a rapid pace.

The short answer is to not become a financial institution, but this is
harder than it seems.  For example, there are two things that ige does
that would seem to make the company a "Money Service Business" (MSB),
subject to Treasury Dept. regulations: 1) accepting direct bank
transfers, 2) accepting money orders.  I could not tell from their
site whether ige allows storage of value on their system, but that
would also make an entity an MSB.  See (Am I an MSB?); 31CFR pt. 103;

Those regulations require a reporting system, and written procedures,
etc.  You definitely need a good lawyer to set you up correctly.

Much more vague is whether these game characters and the online game
money would be considered an "investment contract" and subject to SEC
regulation.  Once a USD value can be assigned to these assets, it is
entirely possible that trading in these assets could be done for
investment purposes (see for
official definition of security and underwriter). You particularly do
not want to be considered an underwriter, or someone who purchases a
"security" with a view to making a profit.  So can these online game
characters, and other assets be considered a security?

The answer, of course, is it depends.  Stock Generation only allowed
trading in online imaginary assets (no real world counterpart), but
because these online imaginary assets were sold for USD, they were
subject to prosecution (see SEC v. SG Limited, d/b/a StockGeneration
et al.,  C.A. No. 00 CV 11141-JLT  (D. mass 2000); If you offered
a service that would improve the online characters for another, for
example, like the "pokemon day care" does, that might be considered an
investment contract. The 5th Circuit considered a contract for care
and feeding of cattle just such an investment contract, which requires
registration or meeting certain exceptions.  A great site is

All of this requires the engagement of very knowledgeable, very
expensive lawyers with particular experience with Treasury Dept. Bank
Secrecy Act FinCEN regulations as well as Securities Laws and
regulations (usually two different areas of expertise).

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