From Monday's Globe and Mail
May 26, 2008 at 3:48 AM EDT
OTTAWA — Canada's financial intelligence agency warns that criminals may be exploiting Internet-based companies that convert cash into electronic gold, exposing a new front in the international effort to restrict terrorist financing and money laundering.
While other channels of money laundering are successfully being shut down, authorities are increasingly worried about a proliferation of "digital precious metals operators" websites that offer clients a chance to conduct Internet business in units backed by gold and silver rather than paper currencies.
The Financial Transactions and Reports Analysis Centre of Canada, or FINTRAC, says in a report these websites have "achieved critical mass on the Web" and are facilitating millions of transactions on the fringe of the international financial system - the equivalent of a Wild West where legitimate businesses, privacy-seeking individuals and criminals can mingle just out of reach of the law.
At stake is the effectiveness of the financial reporting rules that countries such as the United States, Britain and Canada enacted in response to the Sept. 11, 2001, terrorist attacks. A network that allows individuals to move money around the world means criminals can avoid commercial banks and other financial institutions required to turn over their records to the government.
"As financial institutions and non-financial businesses increasingly deter money laundering and terrorism financing, adaptable and technology-savvy criminals and terrorist financiers will likely see other unregulated, exploitable avenues to further their nefarious purposes," concludes the report, which was made available under the Access to Information Act.
"Digital precious metals may become one of them."
FINTRAC, which gathers and analyzes data on financial transactions for law enforcement under oversight of Finance Minister Jim Flaherty, stresses in the 21-page report that websites offering precious metals accounts are serving a "legitimate market demand."
So-called "e-currencies" backed by gold are attractive to companies and individuals involved in international business because they eliminate the risk of fluctuating exchange rates adding to the cost of a transaction.
Still, there is "real potential" for these companies to be used to launder money or transfer cash to someone plotting a terrorist attack, the report says. .
Even if FINTRAC could compel operators of digital metals accounts to turn over their records, the report suggests its analysts would be hard pressed to follow the money. That's because digital metals accounts aren't tied to bank accounts that verify customer information, the report says. Business is conducted almost entirely over the Internet, and websites rarely, if ever, verify the identity of their clients in person.
Companies that offer electronic gold or electronic silver accounts don't actually transfer funds in and out of accounts they create. That's done by "digital currency exchange services," complicating the money trail even more.
While the report, obtained by researcher Ken Rubin, doesn't cite the involvement of any of the websites in a crime, FINTRAC has identified cases of suspected money-laundering that include transactions linked to digital precious metals operators, said Peter Lamey, the agency's spokesman. "Financial intelligence concerning those cases has been disclosed by FINTRAC to investigative agencies," he said.
In 2006, a list of emerging payment methods open to exploitation by criminals was compiled by the Financial Action Task Force, an inter-governmental group based in Paris.
Most digital precious metals websites are run by responsible managers who report all suspicious activity to the police, said Maylin dela Cueva, director of the Global Digital Currency Association.
Starting later this year, Canadian dealers of precious metals and stones - both real and digital - must register with the government.